Sunday, February 22, 2009
The Peg is Here to Stay
Hillary Clinton urges China to keep buying US debt. I'm no economist, but does this signal a strong dollar policy with respect to the yuan? After all, the reason China buys US debt is to finance the US trade deficit with China. That deficit is an artifact of weak US exports relative to US imports. For China to continue to buy US debt, the trade deficit must be sustained, China must maintain the peg to the dollar, for if the yuan appreciates relative to the dollar, there are smaller deficits to finance!