Friday, July 22, 2005

China unpegs the yuan ... The big economic news of the day: China, which has long pegged the yuan to the dollar, just floated the yuan against a range of currencies.

The yuan is still strictly controlled -- officials let it rise only 2% against the dollar -- but it's a significant move all the same. Among the possible repercussions:

• Long-term interest rates in the US could eventually rise since China is a major buyer of US Treasury securities. In the future, Beijing may not be buying as much US debt. This could increase the interest rates Americans pay for mortgages and slow down the US housing market.

• The US inflation rate might tick up if Chinese goods become more expensive. ...

• The rise in the value of the Chinese yuan as well as increases in other Asian currencies will give consumers in those countries more buying power. This could potentially mean more jobs for Americans if the US exports more goods.

I've gone into this quite extensively in the past, so I'll just reiterate my own take here: a rise in the yuan means the U.S. has to get serious about the fact that foreign credit has underwritten our current way of life.

Cheap mortgages and easy credit come with a cost. Unless we are honest with ourselves about the nature and consequences of that cost, foreign currency revaluations and fairer trade practices will never be enough.


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