Floating Exchange Rates
It's no surprise to you that prices change. Laptop computer prices have gone done every year of your life. Car prices have gone up. Insurance has gone up. And the cost of borrowing has been kept pretty low since about year 2001. Why is that? Because the Federal Reserve has been willing to lend dollars to the banks at pretty low interest rates. Why is that? So people will keep spending money. Why is that? So that Wal-Mart will have customers coming in the front door.
Is it a good idea to lend lots of money at low interest rates? Well, it has a lot the same effect as printing lots of extra dollar bills. We get a reputation as loose with our cash. Pretty soon, American dollars aren't worth quite what they used to be worth.
So the government just lets the price of the dollar vis a vis other currencies “float?” Yes, that's right. It's very laissez faire, a French word for “whatever...”
Do some countries follow a different currency valuation policy? Good you asked. The Chinese do. They have a bureacrat who sets the price of the Yuan, also known as the Rnimbi, and he and his staff are allowed to move the price of the Yuan up or down only a certain amount every month. It's a controlled policy of exchange rate flexibility. In practice, the Chinese don't raise the price of the Yuan very much because the US is raising the rate it pays on government borrowing.
What does it mean that the value of Chinese money is rising with respect to other currencies like the dollar? It means that the Chinese will get more dollars for fewer Yuan when they need to buy them. It means that when the Chinese sell something in the US, it will be more expensive for the Americans. It means that Chinese people visiting New York will get more furs and jewels for less.
Is it a good idea to lend lots of money at low interest rates? Well, it has a lot the same effect as printing lots of extra dollar bills. We get a reputation as loose with our cash. Pretty soon, American dollars aren't worth quite what they used to be worth.
So the government just lets the price of the dollar vis a vis other currencies “float?” Yes, that's right. It's very laissez faire, a French word for “whatever...”
Do some countries follow a different currency valuation policy? Good you asked. The Chinese do. They have a bureacrat who sets the price of the Yuan, also known as the Rnimbi, and he and his staff are allowed to move the price of the Yuan up or down only a certain amount every month. It's a controlled policy of exchange rate flexibility. In practice, the Chinese don't raise the price of the Yuan very much because the US is raising the rate it pays on government borrowing.
What does it mean that the value of Chinese money is rising with respect to other currencies like the dollar? It means that the Chinese will get more dollars for fewer Yuan when they need to buy them. It means that when the Chinese sell something in the US, it will be more expensive for the Americans. It means that Chinese people visiting New York will get more furs and jewels for less.