Currency WAR!

A recent article by the Economist Magazine, Oct 14, 2010, discusses tensions in world trade because some governments are interfering with free markets by intervening with the exchange rate of their money.
The basic problem is that a country can make their products that they produce appear to be cheaper then they actually are if they intervene with their currency exchange rate instead of letting the market decide.

My example: if a hamburger costs 10 Yuan in China and the exchange rate is 10:1 to the Canadian or US Dollar, then that would be the same as $1 in Canada. In that case, the burger would be very cheap because it costs 1/5 of what it costs in Canada! Now, if the Chinese worker makes a minimum wage of 20 Yuan per hour instead of $10 an hour like in Canada, then you could say it takes the Chinese worker and the Canadian worker both one half hour to buy a burger. Does that make it fair? If the same Chinese and Canadian workers made the same TV set, car, laptop, or T.V, then the Chinese product would have 1/10 cost and would be much cheaper. Therefore, we would only want those electronics built in China. Is that fair?

A country with an exchange rate that does not reflect the true value of its currency can have an unfair advantage in trade. People will want to buy their product because they are cheaper then anywhere else. This is what is happening with China. The Chinese Government is making lots of money because they sell their products to the rest of the world at high exchange and they don't buy the same amount back. China just keeps all the money. The Chinese government has a lot of money to keep because they export more products than they import (trade surplus). The U.S economy is the other way around, they buy alot more from countries like China than they export (trade deficit).

The arguments between China and the USA are about the exchange rates. If the Yuan was valued higher, Chinese products would cost more and US products would cost less, and maybe the trade deficit would change.

Another problem is what the Chinese should do with all the money that they have! They will want to invest it! But the Chinese have so much money that the only place they can invest their money is to buy bonds with the US treasury department. And they don't want the American dollar to be worth less, and they also want to make sure that they have a good interest rate.

 A government is allowed to print money. But when the government starts printing lots of money, the money becomes worst less. This is called inflation. The Chinese don't want the Americans to just print more money to buy their bonds, they want the money to be worth a lot.

I think it is very important for global trade that we have fair exchange rates.