The Yuan and you...

Critics of China’s foreign exchange restrictions say that the yuan’s peg to the dollar undervalues the currency by as much as 40 percent, making Chinese exports artificially cheap and giving its manufacturers an unfair advantage.

China has promised to eventually allow the yuan to trade freely, but has not said when. It contends that the country's economy and its fragile financial system require a stable currency.

All right, so I hinted at wanting to talk about the Yuan so, maybe tonight I’ll finally get around to it. If you don’t know, the Yuan is the currency of China (like the dollar here). Over the last ten years, as China has experienced this big growth spurt we all keep hearing about, the Chinese government has been keeping things going by not tying the value of the Yuan to any of the world’s other currencies. Things are cheaper in China because, the Chinese government says they’re cheaper!

Let that roll over in your mind for a second.

Okay, let’s say for example the feds suddenly decided to make a dollar worth a dime (a ten worth a dollar, a hundred worth a ten) everything would suddenly get cheaper over night - of course, your wages would go down as well and relatively speaking you’d still be in the same fix but, I think you get the drift.

Now, another thing that happened, is our currency is off the gold standard. However, since World War Two ended, the dollar has been the “imperial currency” of the world which helps things along of course and makes the rest of the world have a vested interest in our economy. Everybody trades with everyone else and the dollar is being used as the common yardstick for everyone in determining the value of goods. Being the country issuing the currency the world uses for this is a good thing.

Under the Bretton Woods system, central banks of countries other than the US were given the task of maintaining fixed exchange rates between their currencies and the dollar. They did this by intervening in foreign exchange markets. If a country’s currency was too high relative to the dollar, its central bank would sell its currency in exchange for dollars, driving down the value of its currency. Conversely, if the value of a country's money was too low, the country would buy its own currency, thereby driving up the price.

The dollar became the world's reserve currency. Yet there were limits placed upon each country and especially the US. Each country had to police its own reserves and currency or be forced to revalue. And the US was constrained because the dollar was fully convertible into gold. This changed in 1971 when Nixon closed the gold window.

But, what if that we‘re to change?

What would the impact on the economy of our country be particularly in an era where the federal government keeps “borrowing against the future,” driving up bigger deficits.

Let’s just say, it wouldn’t be pretty.

That sinking dollar... President Bush continued to wend his way through Europe today. At Weisbaden Army Airfield in Germany he told U.S. troops who’d served in Iraq that America stands with them. He's on what many see as a fence-mending trip to ease tensions over the Iraq war. But Marketplace commentator Robert Reich argues the real action is taking place in another part of the globe entirely.

Well, I’m a layman when it comes to these things but, I had heard some rumblings along these lines and then the other night a few weeks back, I caught a Robert Reich piece on NPR’s marketplace and Reich certainly explains the situation much more eloquently than I ever could so, why don’t you give a listen for yourself and make come to your own conclusions about the implications.