Bellerbys Economics - Mr Stephenson

Thursday, January 31, 2008

Swings and Rounabouts

About a year ago, the Chinese government was under a lot of pressure from the US government who argued that the renminbi was undervalued.

"Not true," said the Chinese, "It's the dollar that's overvalued."

Since then, the dollar has devalued by about 20% and today's announcement that interest rates in the US will be reduced to 3% suggests that the dollar will fall even further. (So sell your dollars now before it's too late). So the Chinese were probably right after all.

This is probably a very sensible market correction and will help to make the US economy more competitive - although it will mean Americans getting used to the idea that they are not as rich as they thought they were - and it will almost certainly lead to higher inflation and higher interest rates later - but that will be under the next presidency. President Bush will at least be able to leave the presidency saying he had ridden out recession and the economy was booming (yes, booming as in bomb).

One side effect of this is that it will continue to reduce the real value of the Chinese government's foreign exchange reserve - still mostly held in dollars which the Chinese government will not be able to shift quickly enough.

It's all a matter of swings and roundabouts as we say here.

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