Following up on Yuan Post

I am following up on the Yuan post because Anne is raising several good points and also some new information for me.

First, my primary concern as I stated in comments is not a raise in the value of the dollar against the Euro. Another 10-20% change in the terms of trade will not do a lot to the US economy because the Eurozone is reasonably self-sufficient (60%+ of their trade is internal trade) and we import and export reasonably similiar goods to each other. My primary concern with China is that the 3.3% drop in dollar valuation that it seems that the Central Bank is considering would be the start of a policy change where the Chinese Central Bank realizes that it is too expensive to hold onto the dollar peg even as a stronger yuan/weaker dollar will cost the Chinese economy significant jobs and the risk of significant political instability.

Now Teddy at It’s Still the Economy, Stupid and a real economist instead of me who plays one on the blogs, has some of these same concerns. He is concerned that the Chinese banks are massively overrun with bad loans but to fix this problem the Chinese have to first pop a real estate bubble and then liquidate their dollar assets in order to gain flexibility and working capital. They have to do this at some time or another, but the real question is the timing. I am speculating that the yuan needs to appreciate relatively quickly, while others such as Garber are arguing that the integration of the Chinese labor force into the world labor market will allow for a neo-Bretton Woods fixed exchange rate system to exist for a generation.

Crossposted at Fester’s Place