Are currencies indexed like this?

[Razorguns]

What is mean is that the Chinese Yuan was indexed to the US dollar. That means that a set amount of Yuan = $1 such as 8.28 Yuan = $1 as an example.

So if the US dollar rose in value, then so did the Yuan. If the US dollar dropped, then so did the Yuan. No matter what happened, 8.28 Yuan = $1.

Now apparently Chinese unhiched the Yuan or unindexed it, the Yuan changed value according to China's monetary policy. It will rise or fall independant of the US dollar. It is currently around 8.11 Yuan = $1. That means that it rose in value in relation to the US dollar. American products will be cheaper for Chinese citizens to buy and Chinese products will be more expensive for American to buy.

Never heard of such a schem. So, ... Why would a country index it to the US dollar like that ... and why would they not index it like that? What are the pros and cons.

Seems the best route is to connect the currency to the US one.

 

[a10j10]

Am I correct in saying that according to this, the Chinese currency is also worth less?
Clarify please...

 

[Big Rick Rock]

What is mean is that the Chinese Yuan was indexed to the US dollar. That means that a set amount of Yuan = $1 such as 8.28 Yuan = $1 as an example.

So if the US dollar rose in value, then so did the Yuan. If the US dollar dropped, then so did the Yuan. No matter what happened, 8.28 Yuan = $1.

Now apparently Chinese unhiched the Yuan or unindexed it, the Yuan changed value according to China's monetary policy. It will rise or fall independant of the US dollar. It is currently around 8.11 Yuan = $1. That means that it rose in value in relation to the US dollar. American products will be cheaper for Chinese citizens to buy and Chinese products will be more expensive for American to buy.

Never heard of such a schem. So, ... Why would a country index it to the US dollar like that ... and why would they not index it like that? What are the pros and cons.

Seems the best route is to connect the currency to the US one.

Nations used the Dollar to index and even back up their currency because the dollar is (or was) the world's most solid coin... Always there and always reliable.



-BRR

 

[GoldenDelicious]

currency value fluctuations are bad for economies. the US is quite stable, so pinning your currency to the US dollar will make importing and exporting less problematic.

there are a few downsides, the main ones being that you lose some of your ability to control your economy through the issuing of more/less money. also, another ountry effectively has control of your currency, so they have an avantage over you in terms of investment etc

 

[slickdadd]

All developing countries peg their currency on one of the larger more stable currencies (GBP, USD, EUR, etc.). I would argue that currency value fluctuations are bad for an economy though. The majority of all fixed currency exchange rate systems have crumbled at some point, while a semi-fixed system that is kept within a certain range has been a bit more successful, such as with China. It wasn't pegged exactly to the USD, but was allowed a certain range in which to fluctuate. Albeit, basically the same thing, but allows for a little more freedom for the central bank and monetary policies.

The main reason China pegged their Currency is because it is believed to be very undervalued. They don't want their economy to grow too fast. By pegging it to the dollar at 8-1, the growth, while already substantial, would not baloon too fast and then collapse. This way they can have a sustained steady growth as they have had the past couple of decades.

 

[SVT-TROY]

Let me just say that I don't fucking know a damn thing. Carry on.

 

[Razorguns]

I just don't understand how this system can work. I mean how China can implement this, and still have control over their "supply of money" to handle economic changes?

We all know inflation rises/falls based upon the supply of money. More money circulating, the lower the value of the currency. Less money circulating, the value of the currency rises.

So if you peg your currency to someone else's -- what's stopping you from printing yourself into economic shangri-la? When there's no negative consequences to your fiscal actions -- you, for all intensive purposes -- have the ability to print out non-stop US dollars without any of the inflationatory drawbacks.

You can buy billions of US debt -- and print your way out the loan.

No??

MTSW - Get yo miami salsa-dancin' ass over here!

 

[GoldenDelicious]

the other things that would have led up to the chinese wanting their currency a bit less dependent on the US is the US dollar weakening in global terms - dont get me wrong, it still is the closest to what youd call a world currency, but what with the euro, the faltering US economy coupled with the war and corresponding international debt, and the maturation/sophistication of the chinese economy that it can stand on its own etc etc, its no surprise that the chinese are going their own way

 

[slickdadd]

I just don't understand how this system can work. I mean how China can implement this, and still have control over their "supply of money" to handle economic changes?

We all know inflation rises/falls based upon the supply of money. More money circulating, the lower the value of the currency. Less money circulating, the value of the currency rises.

So if you peg your currency to someone else's -- what's stopping you from printing yourself into economic shangri-la? When there's no negative consequences to your fiscal actions -- you, for all intensive purposes -- have the ability to print out non-stop US dollars without any of the inflationatory drawbacks.

You can buy billions of US debt -- and print your way out the loan.

No??

MTSW - Get yo miami salsa-dancin' ass over here!

If you peg your currency to someone else, yet print immense amounts of money, while you peg your value as being 8-1, no one will recognize it as that and you will have you currency far overvalued, which will hurt incoming investment and international trade. There is definitely negative consequences to those actions. This is what Mexico did I believe in the recent past to pay off debts. This is off the top of my head, so I'm not sure of the details, but they had a fixed exchange rate, yet just continuously printed more money to pay off an increasing debt, and eventually their currency just exploded and hyperinflated, rendering a lot of their currency virtually useless. It might work in the short run theoretically, but ultimately that isn't feasible. To peg your currency you have to do it based on the market, not just a hypothetical number.

The basis of pegging your currency is to show some stability, that it will always be worth this much. If it isn't pegged, then it is based on the market, and that can fluctuate greatly in a developing country. The peg shows stability and encourages investment and trade. Again though, the peg was a loose or "managed" peg for China, which still allowed some Market effects to take place, yet also allowed stability through some Chinese monetary policy.

 

[bullett]

What is mean is that the Chinese Yuan was indexed to the US dollar. That means that a set amount of Yuan = $1 such as 8.28 Yuan = $1 as an example.

So if the US dollar rose in value, then so did the Yuan. If the US dollar dropped, then so did the Yuan. No matter what happened, 8.28 Yuan = $1.

Now apparently Chinese unhiched the Yuan or unindexed it, the Yuan changed value according to China's monetary policy. It will rise or fall independant of the US dollar. It is currently around 8.11 Yuan = $1. That means that it rose in value in relation to the US dollar. American products will be cheaper for Chinese citizens to buy and Chinese products will be more expensive for American to buy.

Never heard of such a schem. So, ... Why would a country index it to the US dollar like that ... and why would they not index it like that? What are the pros and cons.

Seems the best route is to connect the currency to the US one.

It is my understanding that the Yuan is still pegged tot he dollar, just at 2.5% lower, which makes their goods sell for Higher prices here....this is an attempt to appease the US government prior to a trip by the Chinese President to here in November... It really has little effect, but it is a token.

 

[Razorguns]

he peg shows stability and encourages investment and trade. Again though, the peg was a loose or "managed" peg for China, which still allowed some Market effects to take place, yet also allowed stability through some Chinese monetary policy.

That is true. But if your currency is "pegged" (for all intensive purposes, your currencies are the same, so might as well carry US dollars) -- how can up and downs in your country's inflation, recession, etc. carry over to the global market?

Doesn't look like it can. You can have massive spikes in inflation on your side, drop in consumer confidence, gnp go down, interest rates rise, etc. -- and your yuen can still buy the same amount of US Durangos.

Odd.

 

[bdog527]

The yuan while pegged was not immune to inflationary measures via the dollar or the Chinese printing vast amounts of currencies. Secondly the Chinese would not do this simply because it would defeat the whole point of the pegging in the first place, to prevent inflation.

I believe the yuan is now indexed to a list of far east currencies like the singapore dollar and the yen.

The yuan was and is undervalued and will remain so for the good of the entire world.

 

[Razorguns]

The yuan while pegged was not immune to inflationary measures via the dollar or the Chinese printing vast amounts of currencies. Secondly the Chinese would not do this simply because it would defeat the whole point of the pegging in the first place, to prevent inflation.

I believe the yuan is now indexed to a list of far east currencies like the singapore dollar and the yen.

The yuan was and is undervalued and will remain so for the good of the entire world.

Well when the strength of your economy is it's exports (foreign buyers) -- i can see the value in maximizing the weakness and undervaluation of your currency. Makes your products as cheap as possible to the world.

 

[bdog527]

Well when the strength of your economy is it's exports (foreign buyers) -- i can see the value in maximizing the weakness and undervaluation of your currency. Makes your products as cheap as possible to the world.

Yep, the Chinese economy is completely and utterly dependant on it's exports, if the value of the dollar were to dramatically fall against the yuan it's economy would be wiped out. That is why the Chinese are so reluctant to totally float. The chinese ultimately want to see the downfall of the U.S. and the way they can achieve that is to keep the yuan undervalued against the dollar while holding vast amounts of U.S. treasuries.

 

[Razorguns]

Yep, the Chinese economy is completely and utterly dependant on it's exports, if the value of the dollar were to dramatically fall against the yuan it's economy would be wiped out. That is why the Chinese are so reluctant to totally float. The chinese ultimately want to see the downfall of the U.S. and the way they can achieve that is to keep the yuan undervalued against the dollar while holding vast amounts of U.S. treasuries.

You always want your customer strong and viable. Creates a conducive environment for them to purchase large quantities of your goods.

And when you hold massive amounts of their debts -- it's more even more vitally important. Your money is wrapped up in this process, waiting to be paid off through future transactions.

 

[bdog527]

You always want your customer strong and viable. Creates a conducive environment for them to purchase large quantities of your goods.

And when you hold massive amounts of their debts -- it's more even more vitally important. Your money is wrapped up in this process, waiting to be paid off through future transactions.

I actually shouldn't have put that last part in there. My intention was not to derail your thread into another rehash of the U.S. debt/China debate.

 

[Razorguns]

lol!

 

[flex229]

if you keep a currency pegged to a stronger one for too long, under certain circumstances it can ruin one's economy..

i believe this is what happened to Argentina's peso...this is one of the main reasons why their economy fell apart like it did...

 

[Razorguns]

if you keep a currency pegged to a stronger one for too long, under certain circumstances it can ruin one's economy..

i believe this is what happened to Argentina's peso...this is one of the main reasons why their economy fell apart like it did...

Now Argentina is a very interesting example. If you know of or find a good indepth analysis of that Argentinian economic collapse -- please let me know. It'll tie-in well with this new Economics book i'm reading currently.