ACCORDING to MOHAMED ARIFF the yuan will appreciate only if the dollar does and countries like Thailand and Malaysia should consider pegging their currencies to China's yuan if they are not to be disadvantaged by China's exchange rate policy.
Human hair wigsThere is no need to belabour the point that flexible prices play a key role in correcting imbalances, be they between supply and demand for products, or between saving and investment or, for that matter, global imbalances of international capital or trade flows.
This is simply the magic of the price mechanism in text books.
In the real world, however, prices are not that flexible. For a variety of reasons, not least among them policy preferences to keep prices at certain levels, targeted at given policy objectives. It is not uncommon to see deliberately under-priced or over-priced products, thanks to subsidies or protectionist measures.
Likewise, interest rates are usually manipulated by monetary authorities with the intention of influencing not only savings and investment, but also output, employment and inflation.
Similarly, exchange rates are often controlled by central banks, with flexibilities ranging from free floats to fixed rates.
All this affects the much-needed rebalancing of the global economy. There is near-consensus that the current global economic illness is primarily due to deep-seated global imbalances between production and consumption, savings and investment, and imports and exports of goods and services.
Such imbalances will have to be reduced, if not eliminated. Policy actions that fail to address these critical issues are tantamount to treating the symptoms, such as output loss and unemployment, but not the disease.
Rebalancing warrants both expenditure and price adjustments. Exchange-rate adjustments are among the latter. It is disappointing that the crisis that hit the global economy in mid-2008, with its epicentre in the United States, has led to few self-corrections in the balance-of-payments (BOP) current account.
The US current account deficit has shrunk only marginally from six per cent of gross domestic product (GDP), while East Asian economies continue to register persistent BOP surpluses despite falling exports, and accumulate foreign exchange reserves.
For automatic adjustment mechanisms to work effectively, the crisis may have to last longer, in which case there Clip in human hair extensions will be considerable pain. Nor is there any suggestion that imbalances should be eliminated completely. All that one might reasonably wish to see would be the BOP current account deficit reduced to sustainable levels, which has not happened.
The US current account deficit still exceeds five per cent of GDP, way above the sustainable level estimated at three per cent of GDP.
What is standing in the way has been the absence of realistic exchange rates in the foreign exchange market in recent times. The exchange rates of some major currencies vis-a-vis the dollar have been either rigid or moving in the wrong direction. A weaker greenback would help the faltering US economy by stimulating US output for both exports and domestic consumption, but the US dollar has not depreciated sufficiently to reflect the fundamentals.
The dollar is overvalued, arguably by 15-20 per cent. The problem is that the dollar cannot
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