Is China Keeping The Dollar Artificially High?

Hey Jesseconmists

I get that the U.S. dollar is the world reserve currency, and we like to measure everything in USD as a way of calculating purchasing power. It seems weird to be measured in something that has no finite value and something that is inflated its tits off, but hey we've all agreed on this madness is what we want as a way to measure trade. The China-US trade war put me on to these two economise, and I started reading about it more about the relationship between the two largest fraudsters, I mean economies.

Trading between various countries is about finding value in one country and leveraging their efficiencies to improve your economy. You would look at the cost implications of importing from abroad versus producing locally, and if it makes sense, you will import said product. Each part of the world has favourable conditions or access to raw materials that another part of the world needs and so we're supposed to create a more efficient world by trading with one another.

When trading internationally, your national currency is supposed to act as a counterbalance for what you import and how you manage your imports as not to overextend yourself.

How it would typically work

So say for example South Africa has to trade with another country, let's say England, they like Iron I guess. England buys our Iron and in return give us British Pounds. The South African mine has no use for British pounds as it needs to pay for its operational costs and salaries locally, perhaps it keeps some to hedge against the local devaluation of a currency.

But it would go into the Forex market and dump those pounds in exchange for South African Rands. The more pounds unloaded on the market, the lower the purchasing power of the pound goes, which then curbs your consumption of Iron as you get less Iron for your Pounds purchasing power the next time around.

Its a simple system and use to work okay before we unpegged fiat and fucked it all to hell.

Image source: - 2oceansvibe.com

Revaluation masterbation

The real-world equivalent of circle-jerking.

So since "sound economic policy" is just good enough for you to learn about in an overpriced education system and never put into practice we have this thing called a revaluation. A revaluation is a way to say fuck what it's worth I'll tell you what it's worth and we all agree. Instead of taking the market value, the currency is calculated upward adjustment to a country's official exchange rate relative to a chosen baseline. The baseline can include wage rates, the price of gold, or a foreign currency.

Source: www.investopedia.com

How it currently works in China

So we all know China produces a ton of shit with its access to cheap labour and centrally planned government and we all know Americans can't resist buying cheap shit at Wallmart that they don't need so it was a match made in heaven. However, if the US kept buying from China the way they do now all those dollars would flood the market devaluing the almighty USD and companies would get less for their next purchase and eventually trade would slow down.

So China was like literally fuck all that noise, let's peg the USD and the Yuan. It has now become a cornerstone of China’s economic policy is managing the yuan exchange rate to benefit its exports. China does not have a floating exchange rate that is determined by market forces, as is the case with most advanced economies. Instead, it pegs its currency, the Yuan (or renminbi), to the U.S. dollar.

The Yuan was pegged to the greenback at 8.28 to the dollar for more than a decade starting in 1994.

So what happens when US export to China? Well, the Chinese companies getting the USD they'll go to the PBOC (Peoples Bank of China) give them the USD for the pegged Yuan value and go about their day. The USD is then kept in storage and almost seen as an asset for the bank since they could dump that shit at any time they feel like it, but it also creates a scarcity of dollars and keeps the USD sitting pretty.

We're Corona expose you

We don't know how bad this outbreak is, we don't know how much it's going to cost China and if they'll try to print their way out of the issue. One reserve they could easily turn to is dumping all that USD into the FX market which would devalue the dollar like crazy. If the USD drops in value oh boy are we going to be in for some serious knock-on effects.

My question is will China pull the trigger?

Have your say

What do you good people of steem think?

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