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Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg           China vs. the...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg     Introduction     Ov...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg          GDP per person...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg              Economic G...
Outline   Introduction   Overview of China    The Recent History   Why?   How?   Removal of the Peg                       ...
Outline   Introduction   Overview of China    The Recent History   Why?   How?   Removal of the Peg                       ...
Outline   Introduction   Overview of China    The Recent History   Why?   How?   Removal of the Peg                       ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China    The Recent History   Why?   How?   Removal of the Peg                       ...
Outline   Introduction   Overview of China    The Recent History   Why?   How?   Removal of the Peg                       ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg           Currency Cont...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg           Currency Cont...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg            Currency Con...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg            Currency Con...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg            Currency Con...
Outline   Introduction    Overview of China   The Recent History   Why?   How?   Removal of the Peg                       ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg          Income Payment...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction    Overview of China   The Recent History   Why?   How?   Removal of the Peg                       ...
Outline   Introduction    Overview of China   The Recent History   Why?   How?   Removal of the Peg                       ...
Outline   Introduction    Overview of China   The Recent History   Why?   How?   Removal of the Peg                       ...
Outline    Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg          Current Accou...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
Outline   Introduction   Overview of China   The Recent History   Why?   How?   Removal of the Peg                        ...
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Ffw 2010

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Transcript of "Ffw 2010"

  1. 1. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg China vs. the United States: the Battle for Global Economic Supremacy Ryan W. Herzog Gonzaga University Fall Family Weekend October 22nd, 2010
  2. 2. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Introduction Overview of China The Recent History Why? How? Removal of the Peg
  3. 3. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Introduction • Why has China decided to pursue an exchange rate target?
  4. 4. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Introduction • Why has China decided to pursue an exchange rate target? • How has China been able to maintain the pegged exchange rate without risking a crisis?
  5. 5. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Introduction • Why has China decided to pursue an exchange rate target? • How has China been able to maintain the pegged exchange rate without risking a crisis? • Should we be pressuring China to let the renminbi appreciate?
  6. 6. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Introduction • Why has China decided to pursue an exchange rate target? • How has China been able to maintain the pegged exchange rate without risking a crisis? • Should we be pressuring China to let the renminbi appreciate? • What has the United States gained/lost by China’s foreign policies?
  7. 7. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Introduction • Why has China decided to pursue an exchange rate target? • How has China been able to maintain the pegged exchange rate without risking a crisis? • Should we be pressuring China to let the renminbi appreciate? • What has the United States gained/lost by China’s foreign policies?
  8. 8. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Key Numbers for China • Real GDP grew at an annual rate of 9.6%.
  9. 9. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Key Numbers for China • Real GDP grew at an annual rate of 9.6%. • Unemployment in China is at 9.6%.
  10. 10. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Key Numbers for China • Real GDP grew at an annual rate of 9.6%. • Unemployment in China is at 9.6%. • Inflation is stable at 3.6%.
  11. 11. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Key Numbers for China • Real GDP grew at an annual rate of 9.6%. • Unemployment in China is at 9.6%. • Inflation is stable at 3.6%. • China raised interest rates on deposits and lending to 2.5% and 5.56%, respectively.
  12. 12. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Key Numbers for China • Real GDP grew at an annual rate of 9.6%. • Unemployment in China is at 9.6%. • Inflation is stable at 3.6%. • China raised interest rates on deposits and lending to 2.5% and 5.56%, respectively. • China has $2.6 trillion in reserves.
  13. 13. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg GDP per person US and China (1980-2015)
  14. 14. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Economic Growth in China (1953-2007)
  15. 15. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg The Peg • China has pegged the renminbi at 8.27 yuan per dollar from 1997 through 2005.
  16. 16. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg The Peg • China has pegged the renminbi at 8.27 yuan per dollar from 1997 through 2005. • From 2005 to July of 2008 China let the renminbi slowly appreciate to 6.82 yuan per dollar.
  17. 17. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg The Peg • China has pegged the renminbi at 8.27 yuan per dollar from 1997 through 2005. • From 2005 to July of 2008 China let the renminbi slowly appreciate to 6.82 yuan per dollar. • On June 19th China announced a shift in the exchange rate regime to a managed float. Currently the renminbi is trading at 6.73 yuan per dollar.
  18. 18. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Exchange Rate (1981-2010)
  19. 19. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Asian Crisis • In 1997 many East Asian economies were hard hit by a financial crisis (including Thailand, Indonesia, South Korea, Malaysia, Philippines, and Hong Kong).
  20. 20. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Asian Crisis • In 1997 many East Asian economies were hard hit by a financial crisis (including Thailand, Indonesia, South Korea, Malaysia, Philippines, and Hong Kong). • The financial crisis was caused by quick deregulation in the financial system which removed capital control. Large sums of “hot money” flowed into these countries leaving them suspectable to a currency crisis.
  21. 21. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Asian Crisis • In 1997 many East Asian economies were hard hit by a financial crisis (including Thailand, Indonesia, South Korea, Malaysia, Philippines, and Hong Kong). • The financial crisis was caused by quick deregulation in the financial system which removed capital control. Large sums of “hot money” flowed into these countries leaving them suspectable to a currency crisis.
  22. 22. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Export Led Growth • Asian economies from 1960 through 1990 used exports to fuel growth.
  23. 23. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Export Led Growth • Asian economies from 1960 through 1990 used exports to fuel growth. • The Asian Tigers (South Korea, Hong Kong, Singapore, Taiwan) and Japan used their abundance of cheap labor to specialize in low-skilled manufacturing exports.
  24. 24. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Export Led Growth • Asian economies from 1960 through 1990 used exports to fuel growth. • The Asian Tigers (South Korea, Hong Kong, Singapore, Taiwan) and Japan used their abundance of cheap labor to specialize in low-skilled manufacturing exports. • Combined with improved educational systems allowed these economies to quickly improve labor productivity and subsequent economic growth.
  25. 25. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Export Led Growth • Asian economies from 1960 through 1990 used exports to fuel growth. • The Asian Tigers (South Korea, Hong Kong, Singapore, Taiwan) and Japan used their abundance of cheap labor to specialize in low-skilled manufacturing exports. • Combined with improved educational systems allowed these economies to quickly improve labor productivity and subsequent economic growth. • China had a large surplus of low skilled labor and infrastructure in place to promote low tech manufacturing products.
  26. 26. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg The Peg • The recent financial distress in neighboring countries and the negativity of trade barriers left China with really one option to promote exports.
  27. 27. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg The Peg • The recent financial distress in neighboring countries and the negativity of trade barriers left China with really one option to promote exports. • A pegged exchange rate allowed China to control the price of their exports without worrying about the retaliation that normally follows trade barriers.
  28. 28. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Currency Control through Monetary Policy • We can view foreign exchange through simple demand and supply diagrams.
  29. 29. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Currency Control through Monetary Policy • We can view foreign exchange through simple demand and supply diagrams. • As the U.S. demanded China’s goods, the demand for the yuan increased.
  30. 30. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Currency Control through Monetary Policy • We can view foreign exchange through simple demand and supply diagrams. • As the U.S. demanded China’s goods, the demand for the yuan increased. • Under a floating exchange rate, an increase in the demand for a currency would cause the currency to appreciate.
  31. 31. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Currency Control through Monetary Policy • We can view foreign exchange through simple demand and supply diagrams. • As the U.S. demanded China’s goods, the demand for the yuan increased. • Under a floating exchange rate, an increase in the demand for a currency would cause the currency to appreciate. • To offset the appreciation, China would then buy U.S. dollars.
  32. 32. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Currency Control through Monetary Policy • We can view foreign exchange through simple demand and supply diagrams. • As the U.S. demanded China’s goods, the demand for the yuan increased. • Under a floating exchange rate, an increase in the demand for a currency would cause the currency to appreciate. • To offset the appreciation, China would then buy U.S. dollars. • Essentially, China was buying U.S. debt (government bonds and mortgage backed securities) while the U.S. purchased trillions of China’s exports.
  33. 33. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Trade with China (1999-2009)
  34. 34. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Income Payments and Receipts (1999-2009)
  35. 35. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Monetary Policy • Countries are faced with a choice when using monetary policy. Countries can:
  36. 36. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Monetary Policy • Countries are faced with a choice when using monetary policy. Countries can: • Set interest rates
  37. 37. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Monetary Policy • Countries are faced with a choice when using monetary policy. Countries can: • Set interest rates • Have free capital mobility
  38. 38. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Monetary Policy • Countries are faced with a choice when using monetary policy. Countries can: • Set interest rates • Have free capital mobility • Fix exchange rates
  39. 39. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Monetary Policy • Countries are faced with a choice when using monetary policy. Countries can: • Set interest rates • Have free capital mobility • Fix exchange rates • Countries cannot have all three.
  40. 40. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Monetary Policy • Countries are faced with a choice when using monetary policy. Countries can: • Set interest rates • Have free capital mobility • Fix exchange rates • Countries cannot have all three. • By choosing to peg the yuan to the dollar, China is giving up the ability to set interest rates.
  41. 41. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Monetary Policy • Countries are faced with a choice when using monetary policy. Countries can: • Set interest rates • Have free capital mobility • Fix exchange rates • Countries cannot have all three. • By choosing to peg the yuan to the dollar, China is giving up the ability to set interest rates. • If the United States lowers interest rates then foreign investors will shift away from dollar assets. An decrease in the demand for dollars causes a depreciation (an appreciation of the yuan). China must also lower rates to prevent the appreciation.
  42. 42. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Monetary Policy • Countries are faced with a choice when using monetary policy. Countries can: • Set interest rates • Have free capital mobility • Fix exchange rates • Countries cannot have all three. • By choosing to peg the yuan to the dollar, China is giving up the ability to set interest rates. • If the United States lowers interest rates then foreign investors will shift away from dollar assets. An decrease in the demand for dollars causes a depreciation (an appreciation of the yuan). China must also lower rates to prevent the appreciation. • China has also elected to keep a tight control on foreign capital flows (opposite other Asian economies) which prevents against a large sudden shift in capital.
  43. 43. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Foreign Reserves • Countries choosing to peg their exchange rate, must be willing to buy and sell foreign currency on demand.
  44. 44. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Foreign Reserves • Countries choosing to peg their exchange rate, must be willing to buy and sell foreign currency on demand. • The central bank needs to hold an ample surplus of foreign exchange. Many emerging markets (even some developed economies) failed to hold sufficient foreign exchange and faced bank runs.
  45. 45. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Foreign Reserves • Countries choosing to peg their exchange rate, must be willing to buy and sell foreign currency on demand. • The central bank needs to hold an ample surplus of foreign exchange. Many emerging markets (even some developed economies) failed to hold sufficient foreign exchange and faced bank runs. • China has followed the Federal Reserve’s massive increase in the money supply, China created a stock pile of foreign reserves ($2.6 trillion).
  46. 46. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Foreign Reserves • Countries choosing to peg their exchange rate, must be willing to buy and sell foreign currency on demand. • The central bank needs to hold an ample surplus of foreign exchange. Many emerging markets (even some developed economies) failed to hold sufficient foreign exchange and faced bank runs. • China has followed the Federal Reserve’s massive increase in the money supply, China created a stock pile of foreign reserves ($2.6 trillion). • It is common for domestic and foreign policy goals to become misaligned. China is in a high growth, high inflation environment which calls for higher interest rates.
  47. 47. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg General Effects on US • Low interest rates as China became a large purchaser of U.S. debt.
  48. 48. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg General Effects on US • Low interest rates as China became a large purchaser of U.S. debt. • Cheap goods from China.
  49. 49. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg General Effects on US • Low interest rates as China became a large purchaser of U.S. debt. • Cheap goods from China. • A loss in competitiveness for US manufacturing.
  50. 50. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Why are we Pressuring China? • Cheap Chinese goods are having an adverse effect on our job market.
  51. 51. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Why are we Pressuring China? • Cheap Chinese goods are having an adverse effect on our job market. • Will an appreciation in the yuan improve unemployment?
  52. 52. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Why are we Pressuring China? • Cheap Chinese goods are having an adverse effect on our job market. • Will an appreciation in the yuan improve unemployment? • To help restore global imbalances.
  53. 53. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Current Account for US and China (1980-2010)
  54. 54. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full?
  55. 55. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full? • Higher inflation in the United States will reduce the value of all U.S. denominated debt.
  56. 56. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full? • Higher inflation in the United States will reduce the value of all U.S. denominated debt. • Many economists are calling for a 3-4% inflation target.
  57. 57. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full? • Higher inflation in the United States will reduce the value of all U.S. denominated debt. • Many economists are calling for a 3-4% inflation target. • A appreciation in the yuan will make China’s exports more expensive and cause a potential slowdown in growth.
  58. 58. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full? • Higher inflation in the United States will reduce the value of all U.S. denominated debt. • Many economists are calling for a 3-4% inflation target. • A appreciation in the yuan will make China’s exports more expensive and cause a potential slowdown in growth. • A devaluation of the dollar will drastically reduce the value of China’s assets.
  59. 59. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full? • Higher inflation in the United States will reduce the value of all U.S. denominated debt. • Many economists are calling for a 3-4% inflation target. • A appreciation in the yuan will make China’s exports more expensive and cause a potential slowdown in growth. • A devaluation of the dollar will drastically reduce the value of China’s assets. • Is China at risk for overheating?
  60. 60. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full? • Higher inflation in the United States will reduce the value of all U.S. denominated debt. • Many economists are calling for a 3-4% inflation target. • A appreciation in the yuan will make China’s exports more expensive and cause a potential slowdown in growth. • A devaluation of the dollar will drastically reduce the value of China’s assets. • Is China at risk for overheating? • By maintaining the peg, China is adopting the expansionary monetary policy of the United States.
  61. 61. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full? • Higher inflation in the United States will reduce the value of all U.S. denominated debt. • Many economists are calling for a 3-4% inflation target. • A appreciation in the yuan will make China’s exports more expensive and cause a potential slowdown in growth. • A devaluation of the dollar will drastically reduce the value of China’s assets. • Is China at risk for overheating? • By maintaining the peg, China is adopting the expansionary monetary policy of the United States. • They are growing at a nearly 10% rate, and could soon experience high inflation.
  62. 62. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for China • Will the United States be able to repay their debt in full? • Higher inflation in the United States will reduce the value of all U.S. denominated debt. • Many economists are calling for a 3-4% inflation target. • A appreciation in the yuan will make China’s exports more expensive and cause a potential slowdown in growth. • A devaluation of the dollar will drastically reduce the value of China’s assets. • Is China at risk for overheating? • By maintaining the peg, China is adopting the expansionary monetary policy of the United States. • They are growing at a nearly 10% rate, and could soon experience high inflation. • China just raised both their deposit and lending rates by 25 base points.
  63. 63. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for U.S. • Will interest rates increase? Short-run or long-run?
  64. 64. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for U.S. • Will interest rates increase? Short-run or long-run? • Will we be able to replace China as a large purchaser of U.S. debt?
  65. 65. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for U.S. • Will interest rates increase? Short-run or long-run? • Will we be able to replace China as a large purchaser of U.S. debt? • If China dumps dollars how far will the dollar depreciate?
  66. 66. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for U.S. • Will interest rates increase? Short-run or long-run? • Will we be able to replace China as a large purchaser of U.S. debt? • If China dumps dollars how far will the dollar depreciate? • Many U.S. firms use Chinese’s goods as inputs in the production process.
  67. 67. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for U.S. • Will interest rates increase? Short-run or long-run? • Will we be able to replace China as a large purchaser of U.S. debt? • If China dumps dollars how far will the dollar depreciate? • Many U.S. firms use Chinese’s goods as inputs in the production process. • With the Federal Reserve pumping trillions to help stabilize the economy will this push inflation over the edge?
  68. 68. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Concerns for U.S. • Will interest rates increase? Short-run or long-run? • Will we be able to replace China as a large purchaser of U.S. debt? • If China dumps dollars how far will the dollar depreciate? • Many U.S. firms use Chinese’s goods as inputs in the production process. • With the Federal Reserve pumping trillions to help stabilize the economy will this push inflation over the edge? • Will their be any improvement in jobs?
  69. 69. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Holders of Federal Debt • The gross national debt is $13.2 trillion of which:
  70. 70. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Holders of Federal Debt • The gross national debt is $13.2 trillion of which: • $8.6 trillion is held publicly.
  71. 71. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Holders of Federal Debt • The gross national debt is $13.2 trillion of which: • $8.6 trillion is held publicly. • $4 trillion is held by foreign and international investors.
  72. 72. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Holders of Federal Debt • The gross national debt is $13.2 trillion of which: • $8.6 trillion is held publicly. • $4 trillion is held by foreign and international investors. • $800 billion is held by Federal Reserve banks • $4.6 trillion is held by the government.
  73. 73. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Supplier of Funds to the U.S. • The government debt is projected to increase to nearly $20 trillion by 2020.
  74. 74. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Supplier of Funds to the U.S. • The government debt is projected to increase to nearly $20 trillion by 2020. • China currently holds $900 billion in U.S. government debt.
  75. 75. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Supplier of Funds to the U.S. • The government debt is projected to increase to nearly $20 trillion by 2020. • China currently holds $900 billion in U.S. government debt. • Federal Old Age and Survivors Trust Fund holds $2.4 trillion.
  76. 76. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Supplier of Funds to the U.S. • The government debt is projected to increase to nearly $20 trillion by 2020. • China currently holds $900 billion in U.S. government debt. • Federal Old Age and Survivors Trust Fund holds $2.4 trillion. • As we deplete the retirement trust funds and government debt grows we are going to need large buyers of government debt.
  77. 77. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg A Solution to Unemployment • There will likely be a small change in manufacturing jobs.
  78. 78. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg A Solution to Unemployment • There will likely be a small change in manufacturing jobs. • Nearly 8 million manufacturing jobs have been lost since 2000.
  79. 79. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg A Solution to Unemployment • There will likely be a small change in manufacturing jobs. • Nearly 8 million manufacturing jobs have been lost since 2000. • Above equilibrium wages will keep manufacturing suppressed.
  80. 80. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg A Solution to Unemployment • There will likely be a small change in manufacturing jobs. • Nearly 8 million manufacturing jobs have been lost since 2000. • Above equilibrium wages will keep manufacturing suppressed. • There are no insurances the jobs will return to the United States.
  81. 81. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg A Solution to Unemployment • There will likely be a small change in manufacturing jobs. • Nearly 8 million manufacturing jobs have been lost since 2000. • Above equilibrium wages will keep manufacturing suppressed. • There are no insurances the jobs will return to the United States. • Job losses could increase in industries that depend on Chinese imports.
  82. 82. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg A Solution to Unemployment • There will likely be a small change in manufacturing jobs. • Nearly 8 million manufacturing jobs have been lost since 2000. • Above equilibrium wages will keep manufacturing suppressed. • There are no insurances the jobs will return to the United States. • Job losses could increase in industries that depend on Chinese imports. • Exporting industries in the US will be hurt (car manufacturing).
  83. 83. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Conclusion • Should the United States be putting pressure on China to let the yuan appreciate?
  84. 84. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Conclusion • Should the United States be putting pressure on China to let the yuan appreciate? • U.S. made car exports totaled 56,597 from January 2010-July 2010. An eightfold increase from the previous year (8,847). In 2000, U.S. made car exports to China totaled 215.
  85. 85. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Conclusion • Should the United States be putting pressure on China to let the yuan appreciate? • U.S. made car exports totaled 56,597 from January 2010-July 2010. An eightfold increase from the previous year (8,847). In 2000, U.S. made car exports to China totaled 215. • China is our third largest export market.
  86. 86. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Conclusion • Should the United States be putting pressure on China to let the yuan appreciate? • U.S. made car exports totaled 56,597 from January 2010-July 2010. An eightfold increase from the previous year (8,847). In 2000, U.S. made car exports to China totaled 215. • China is our third largest export market. • Are we risking a bigger trade war? Smoot-Hawley Tariff Act was a likely contributor to the Great Depression.
  87. 87. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Conclusion • Should the United States be putting pressure on China to let the yuan appreciate? • U.S. made car exports totaled 56,597 from January 2010-July 2010. An eightfold increase from the previous year (8,847). In 2000, U.S. made car exports to China totaled 215. • China is our third largest export market. • Are we risking a bigger trade war? Smoot-Hawley Tariff Act was a likely contributor to the Great Depression. • Will market pressures be sufficient?
  88. 88. Outline Introduction Overview of China The Recent History Why? How? Removal of the Peg Conclusion • Should the United States be putting pressure on China to let the yuan appreciate? • U.S. made car exports totaled 56,597 from January 2010-July 2010. An eightfold increase from the previous year (8,847). In 2000, U.S. made car exports to China totaled 215. • China is our third largest export market. • Are we risking a bigger trade war? Smoot-Hawley Tariff Act was a likely contributor to the Great Depression. • Will market pressures be sufficient? • What about the Currency Reform for Fair Trade Act that was passed a few weeks ago.
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