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Another few hours, another thing I don’t understand: Tim Geithner says China is “manipulating” its currency exchange rate, and James Fallows says Chinese will not “respond blandly” to being labeled “manipulators” when they hold over a trillion dollars in US debt. Here’s the thing: the Chinese are accused of using their management of currency exchange to keep the yuan artificially low against the dollar, to prop up exports to the US. Some people are muttering that the Chinese might retaliate for Geithner’s affront by dumping large amounts of US bonds. But the reason we’re afraid of that happening is that it would…cause the dollar to fall dramatically. Which would cause the yuan to rise against the dollar. Which would be a clear case of nasal face-spiting, since the whole point of the Chinese “manipulation” was to keep the yuan low against the dollar. And given that, how likely is it, really, that China is going to retaliate in this fashion? Doesn’t Geithner have the Chinese in a box, here?
Or am I, as usual, missing something?
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