Tuesday, March 18, 2008

The Declining Dollar

It should come as no surprise when I say that the U.S. economy is a mess right now! Runaway government spending has led to inflation and low interest rates discouraged savings and helped lead to the current "sub prime mortgage" crisis. The low interest rates and weakening confidence in the economy have also devalued the price of the dollar abroad.

While this may be good for exporters and the domestic tourism industry, the flip-side of the coin is that imports and travel abroad are becoming more costly. Since one of our major imports happens to be oil, I'm sure you've noticed this at the gas pump.

For a long time, China pegged the price of its currency to the U.S. Dollar. This and an abundance of labor helped the Chinese economy become a major world manufacturer and exporter. Periodically, the peg was changed ever so slightly. Fairly recently, policy changed and the Yuan has been pegged to a "basket of currencies." The result is a more liberal currency that is allowed to make slight adjustments.

When I arrived near the end of June 2007, one U.S. Dollar bought about 7.62 Chinese Yuan. This morning, one U.S. Dollar would buy you 7.083 Yuan. Doesn't sound like a big change? Well, it's an appreciation of 7.05% of the Yuan to the Dollar. When you consider that most banks (brick and mortar) offer about 1.5-2.5% interest for savings accounts, it seems like a larger return.

Using July's rate, my monthly living stipend (paid in RMB) would be worth roughly $524.94. Now my monthly stipend is equivalent to about $564.73, an increase of nearly $40/month. My small living stipend is just a drop in the bucket compared to the large business transactions that occur for Chinese goods each day. When you go to Wal-Mart, what items didn't come from China? The Always Low Prices may soon be increasing...

100 RMB, now worth slightly more than a Hamilton and four Washingtons.

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