The Gold Standard Fell As All Currency Pegs Do — Martin Armstrong

The fate of pegs is always the same because there is this thing we call the business cycle.

Armstrong Economics
The Gold Standard Fell As All Currency Pegs Do
Martin Armstrong

Gene Frieda — China’s Difficult Balancing Act

China needs to keep growth high enough to maintain social stability, but also must preserve external stability via the renminbi’s exchange rate. How China manages its currency during its economic policy shift could have important global consequences.

China is not sovereign in its currency since it pegs to the dollar. Currency sovereignty requires floating the rate whereas as peg sets a fixed rate. This means that China domestic policy is constrained by have to manage the exchange rate within the corridor of the peg.

China needs to float the RMB to return to currency sovereignty and manage its economy instead of managing the exchange rate. As Russia did when hit by US sanctions.

Project Syndicate
China’s Difficult Balancing Act

Gene Frieda | executive vice president and global strategist for PIMCO

Dean Baker — China and Currency Values: Fast Growing Countries Run Trade Deficits

No specific mention of the USD peg. Of course, a country that pegs to another currency is "manipulating its currency" (Trump before Xi visit) or "managing" its currency (Baker), which amounts to the same thing. The country is not allowing the market to set the rate by floating the currency.

To be consistent the US should be pressuring China to drop its peg to the USD.

My own reading is that China wants to hold the peg awhile longer, not to manipulate the relative value but rather to reduce exchange rate volatility. It needs and wants a stable currency.

Beat the Press
China and Currency Values: Fast Growing Countries Run Trade Deficits
Dean Baker | Co-director of the Center for Economic and Policy Research in Washington, D.C

Bill Mitchell — Iceland should not peg its currency to the euro or any other currencies

One of the reasons Iceland has recovered so well and left the Eurozone nations in its wake is because its currency was floating. Pegging it to the euro would be a very silly thing for that nation to do....

Bill Mitchell – billy blog
Iceland should not peg its currency to the euro or any other currencies
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Dirk Ehnts — Goodhart on pegged exchange rates

One wishes that the creators of the euro would have read this text-book before the creation of the euro. The TARGET2 system has worked properly, but as mentioned by Goodhart “such financing of itself does nothing to correct the imbalance caused by a divergence between the pegged and the ‘equilibrium’ exchange rate”. The imbalance bothers not because it has to be financed – TARGET2 takes care of that – but because employment is low in those areas where the ‘equilibrium’ exchange rate is not correct.

econoblog 101
Goodhart on pegged exchange rates
Dirk Ehnts | Berlin School for Economics and Law

Dean Baker — Correction to Mankiw: Economists actually agree, just because you call something “free trade” doesn’t make it free trade

In principle we could get back to full employment with large government budget deficits, but that is not going to happen for political reasons. Aggressive use of work sharing leading to shorter workweeks can also move us toward full employment, but this is also not something we are likely to see any time soon.

This means that if we want to get back to full employment, we have to reduce our $500 billion (@ 3 percent of GDP) trade deficit. (This is the intro econ on which all economists agree. It can even be found in Mankiw’s textbook.) Reducing the trade deficit means taking steps to lower the value of the dollar against other currencies. These trade agreements would be the obvious place to have currency rules. If we don’t address the currency issue here, where exactly are we going to do it?

Real-World Economics Review
Correction to Mankiw: Economists actually agree, just because you call something “free trade” doesn’t make it free trade

Dean Baker

Bill Mitchell — SNB decision tells us that the crisis is entering a new phase

Switzerland – home of the secret bank vaults, which house treasures stolen from people (particularly the Jewish victims) by the Nazis during WW2 and ill-gotten cash by capitalists who wish to evade scrutiny of prudential and tax authorities of their domiciled nations. Now it is the canary, which has just sung to tell us that all the hubris about Eurozone recovery cannot cover up the reality that the crisis is not yet over and requires root and branch reform to the policy ideology that exposes the floored design of the monetary union. The – Decision – last week (January 15, 2015) by the Swiss National Bank (SNB) to both break the peg of the Swiss franc to the euro and cut its interest rate on sight deposits to -0.75 per cent signals the surrender by that nation to the reality surrounding its borders. The interest rate decision was required after it decided to scrap the exchange rate peg, given that it didn’t want a credit crunch killing the domestic economy. The appreciation of the exchange rate, which has been held artificially low by the peg, will already undermine domestic spending. The SNB said its decision as reversing its previous “exceptional and temporary measure”, which “protected the Swiss economy from serious harm” as the exchange rate became overvalued. But the decision itself was rather extraordinary given it was seemingly so surprising for most and central bankers are meant to be cautious types. 

But the decision has a logic that is easily understood by those who are not trapped within the Euro Troika narrative.…

Bill Mitchell – billy blog
SNB decision tells us that the crisis is entering a new phaseBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

Brian Romanchuk — Currency Regimes Matter If Policymakers Understand Them

In this article, Antonia Fatas argues that exchange rate regimes (like the euro) have limited power to explain differences of economic outcomes. It is based on an article by Andrew K. Rose, which looks at the currency regimes of smaller (mainly developing) economies during the global financial crisis.

Paul Krugman responded here, noting that bond yields only rose due debt concerns in the euro countries. From the point of view of the bond markets, that is a crucial point: a country that does not control the currency of its debt emissions is just another credit market borrower, and can end up facing prohibitive default risk premia.

Since his article illustrates that point well, I will discuss here the non-interest rate aspects of this debate. The currency regime is a critical component of Modern Monetary Theory (MMT), and so this debate is very important for understanding MMT.

Bond Economics
Currency Regimes Matter If Policymakers Understand Them
Brian Romanchuk

Caijing — China Plans to Expand Yuan Trading Band in "Near Future"

China is considering widening the trading band of its currency "in the near future", despite recent weak trade, industrial and GDP figures, said Yi Gang, Deputy Governor of the People's Bank of China.

"The exchange rate is going to be more market-oriented," Yi said at an International Monetary Fund conference in Washington yesterday, "Last year, they increased the floating band from 0.5 percent. I think in the near future they're going to increase the floating band even further."

The statement came after the yuan rallied to a 19-year high to close at 6.1723 per dollar in Shanghai, the upper limit of a trading range that spans 1 percent either side of the central bank's daily reference rate.

Caijing
China Plans to Expand Yuan Trading Band in "Near Future"