Inflation:In 2 years, prices increased by 5 quadrillion %

[LGBR]

http://www.rogershermansociety.com/yugoslavia.htm

 

 

 

 

 

 

 

Under Tito, Yugoslavia ran a budget deficit that was financed by printing money. This led to a rate of inflation of 15 to 25 percent per year. After Tito, the Communist Party pursued progressively more irrational economic policies. These policies and the breakup of Yugoslavia (Yugoslavia now consists of only Serbia and Montenegro) led to heavier reliance upon printing or otherwise creating money to finance the operation of the government and the socialist economy. This created the hyperinflation.

 

 

 

 

 

 

 

By the early 1990s the government used up all of its own hard currency reserves and proceded to loot the hard currency savings of private citizens. It did this by imposing more and more difficult restrictions on private citizens' access to their hard currency savings in government banks.

 

 

 

 

 

 

 

The government operated a network of stores at which goods were supposed to be available at artificially low prices. In practice these store seldom had anything to sell and goods were only available at free markets where the prices were far above the official prices that goods were supposed to sell at in government stores. All of the government gasoline stations eventually were closed and gasoline was available only from roadside dealers whose operation consisted of a car parked with a plastic can of gasoline sitting on the hood. The market price was the equivalent of $8 per gallon. Most car owners gave up driving and relied upon public transportation. But the Belgrade transit authority (GSP) did not have the funds necessary for keeping its fleet of 1200 buses operating. Instead it ran fewer than 500 buses. These buses were overcrowded and the ticket collectors could not get aboard to collect fares. Thus GSP could not collect fares even though it was desperately short of funds.

 

 

 

 

 

 

 

Delivery trucks, ambulances, fire trucks and garbage trucks were also short of fuel. The government announced that gasoline would not be sold to farmers for fall harvests and planting.

 

 

 

 

 

 

 

Despite the government desperate printing of money it still did not have the funds to keep the infrastructure in operation. Pot holes developed in the streets, elevators stopped functioning, and construction projects were closed down. The unemployment rate exceeded 30 percent.

 

 

 

 

 

 

 

The government tried to counter the inflation by imposing price controls. But when inflation continued, the government price controls made the price producers were getting so ridiculous low that they simply stopped producing. In October of 1993 the bakers stopped making bread and Belgrade was without bread for a week. The slaughter houses refused to sell meat to the state stores and this meant meat became unvailable for many sectors of the population. Other stores closed down for inventory rather than sell their goods at the government mandated prices. When farmers refused to sell to the government at the artificially low prices the government dictated, government irrationally used hard currency to buy food from foreign sources rather than remove the price controls. The Ministry of Agriculture also risked creating a famine by selling farmers only 30 percent of the fuel they needed for planting and harvesting.

 

 

 

 

 

 

 

Later the government tried to curb inflation by requiring stores to file paperwork every time they raised a price. This meant that many store employees had to devote their time to filling out these government forms. Instead of curbing inflation this policy actually increased inflation because the stores tended to increase prices by larger increments so they would not have file forms for another price increase so soon.

 

 

 

 

 

 

 

In October of 1993 they created a new currency unit. One new dinar was worth one million of the "old" dinars. In effect, the government simply removed six zeroes from the paper money. This, of course, did not stop the inflation.

 

 

 

 

 

 

 

In November of 1993 the government postponed turning on the heat in the state apartment buildings in which most of the population lived. The residents reacted to this by using electrical space heaters which were inefficient and overloaded the electrical system. The government power company then had to order blackouts to conserve electricity.

 

 

 

 

 

 

 

In a large psychiatric hospital 87 patients died in November of 1994. The hospital had no heat, there was no food or medicine and the patients were wandering around naked.

 

 

 

 

 

 

 

Between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent. This number is a 5 with 15 zeroes after it. The social structure began to collapse. Thieves robbed hospitals and clinics of scarce pharmaceuticals and then sold them in front of the same places they robbed. The railway workers went on strike and closed down Yugoslavia's rail system.

 

 

 

 

 

 

 

The government set the level of pensions. The pensions were to be paid at the post office but the government did not give the post offices enough funds to pay these pensions. The pensioners lined up in long lines outside the post office. When the post office ran out of state funds to pay the pensions the employees would pay the next pensioner in line whatever money they received when someone came in to mail a letter or package. With inflation being what it was, the value of the pension would decrease drastically if the pensioners went home and came back the next day. So they waited in line knowing that the value of their pension payment was decreasing with each minute they had to wait.

 

 

 

 

 

 

 

Many Yugoslavian businesses refused to take the Yugoslavian currency, and the German Deutsche Mark effectively became the currency of Yugoslavia. But government organizations, government employees and pensioners still got paid in Yugoslavian dinars so there was still an active exchange in dinars. On November 12, 1993 the exchange rate was 1 DM = 1 million new dinars. Thirteen days later the exchange rate was 1 DM = 6.5 million new dinars and by the end of November it was 1 DM = 37 million new dinars.

 

 

 

 

 

 

 

At the beginning of December the bus workers went on strike because their pay for two weeks was equivalent to only 4 DM when it cost a family of four 230 DM per month to live. By December 11th the exchange rate was 1 DM = 800 million and on December 15th it was 1 DM = 3.7 billion new dinars. The average daily rate of inflation was nearly 100 percent. When farmers selling in the free markets refused to sell food for Yugoslavian dinars the government closed down the free markets. On December 29 the exchange rate was 1 DM = 950 billion new dinars.

 

 

 

 

 

 

 

About this time there occurred a tragic incident. As usual, pensioners were waiting in line. Someone passed by the line carrying bags of groceries from the free market. Two pensioners got so upset at their situation and the sight of someone else with groceries that they had heart attacks and died right there.

 

 

 

 

 

 

 

At the end of December the exchange rate was 1 DM = 3 trillion dinars and on January 4, 1994 it was 1 DM = 6 trillion dinars. On January 6th the government declared that the German Deutsche was an official currency of Yugoslavia. About this time the government announced a NEW "new" Dinar which was equal to 1 billion of the old "new" dinars. This meant that the exchange rate was 1 DM = 6,000 new new Dinars. By January 11 the exchange rate had reached a level of 1 DM = 80,000 new new Dinars. On January 13th the rate was 1 DM = 700,000 new new Dinars and six days later it was 1 DM = 10 million new new Dinars.

 

 

 

 

 

 

 

The telephone bills for the government operated phone system were collected by the postmen. People postponed paying these bills as much as possible and inflation reduced their real value to next to nothing. One postman found that after trying to collect on 780 phone bills he got nothing so the next day he stayed home and paid all of the phone bills himself for the equivalent of a few American pennies.

 

 

 

 

 

 

 

Here is another illustration of the irrationality of the government's policies: James Lyon, a journalist, made twenty hours of international telephone calls from Belgrade in December of 1993. The bill for these calls was 1000 new new dinars and it arrived on January 11th. At the exchange rate for January 11th of 1 DM = 150,000 dinars it would have cost less than one German pfennig to pay the bill. But the bill was not due until January 17th and by that time the exchange rate reached 1 DM = 30 million dinars. Yet the free market value of those twenty hours of international telephone calls was about $5,000. So despite being strapped for hard currency, the government gave James Lyon $5,000 worth of phone calls essentially for nothing.

 

 

 

 

 

 

 

It was against the law to refuse to accept personal checks. Some people wrote personal checks knowing that in the few days it took for the checks to clear, inflation would wipe out as much as 90 percent of the cost of covering those checks.

 

 

 

 

 

 

 

On January 24, 1994 the government introduced the "super" Dinar equal to 10 million of the new new Dinars. The Yugoslav government's official position was that the hyperinflation occurred "because of the unjustly implemented sanctions against the Serbian people and state."

[Duke_Freedom]

That's what you get when people who have no clue about economics are trying to run communist states. :roll:

[Celt23]

If those people want to run a communist state, they need to actually use communism.

[LGBR]

That's what you get when people who have no clue about economics are trying to run communist states. :roll:

How could they have prevented it though? What would YOU do?

 

 

 

 

 

 

 

Kind of interesting to know what you think, you have a lot of experience and knowledge in the world of economics

[Mr_Putter]

That was fun to read :).

[LGBR]

Its like a story that always keeps you on th edge of your seat, how could they mess themselves up even more

[lotuslord212]

It was fun to read! :D

 

 

 

 

 

 

 

HAHAAHA I lied.

 

 

 

 

 

 

 

Select my message and read!!!

[Oy_the_Great]

It was fun to read! :D

 

 

 

 

 

 

 

HAHAAHA I lied.

 

 

 

 

 

 

 

Select my message and read!!!

 

 

 

 

 

 

 

I guess you think you're incredibly funny now?

 

 

 

 

 

 

 

Anyway, I completerly agree with Duke; people who have no clue what economics are running a country can have the perfect ideals, they'll never succeed. That's one of the reasons why Communism so often failed; Cḫ̩̉̉ and Fidel loathed economists and thought they knew how to handle it.

 

 

 

Well, they failed, although Cuba still is the best example of Communism in practice.

[LGBR]

 

It was fun to read! :D

 

 

 

 

 

 

 

HAHAAHA I lied.

 

 

 

 

 

 

 

Select my message and read!!!

 

 

 

 

 

 

 

I guess you think you're incredibly funny now?

 

 

 

 

 

 

 

Anyway, I completerly agree with Duke; people who have no clue what economics are running a country can have the perfect ideals, they'll never succeed. That's one of the reasons why Communism so often failed; Cḫ̩̉̉ and Fidel loathed economists and thought they knew how to handle it.

 

 

 

Well, they failed, although Cuba still is the best example of Communism in practice.

What about China

[Duke_Freedom]

I don't know anything about the exact situation there ofcourse, but the scenario seems general enough to summarize it as follows:

 

 

 

 

 

 

 

What you need to understand is that money itself, in essence, is worthless. Its paper value is worth next to nothing and it has no practical use other then the ability to buy and sell other products/services with it. This means that the value of money is completely based on the faith/trust people have in the currency.

 

 

 

 

 

 

 

The faith in currency (and thus "the price" of the currency) comes from the widely acceptance of the currency in transaction, the price stability of the currency, the easy tradability of the currency and (possibly) a governmental "insurance" of the currency (like the old gold standard used to be for the dollar - but there are other sorts of "insurances" too).

 

 

 

 

 

 

 

Printing money directly influences the price stability of a currency. Because money itself is worthless, the creation of new currency does not create any value at all.

 

 

 

 

 

 

 

Now if a certain currency - let's call it X - is valued $1 right now and the governement prints so many new X bills that the total amount of currency X in the economy doubled then the value of one X is halved in terms of $'s. In other words, you could say that printing money is a direct tax on people who own the currency.

 

 

 

 

 

 

 

Enforcing artificially low prices, price controls, imposing restrictions on the currency of people all break down the "easy tradability" of the currency.

 

 

 

 

 

 

 

As a result of the money printing and the removal of the easy tradability, the acceptance of the currency disappears as well. Would you "buy" a currency with your product if you knew that within a few days it would only be worth 10% of what you "paid" for it? No.

 

 

 

 

 

 

 

And then the faith is nearly completely gone and thus the "value" of the currency approaches its intrinsic value (which is next to zero) more and more.

 

 

 

 

 

 

 

Bottom line is - printing money is an artificial way of funding your budget deficit and will ruin an economy if it is overdone.

[Oy_the_Great]

 

 

It was fun to read! :D

 

 

 

 

 

 

 

HAHAAHA I lied.

 

 

 

 

 

 

 

Select my message and read!!!

 

 

 

 

 

 

 

I guess you think you're incredibly funny now?

 

 

 

 

 

 

 

Anyway, I completerly agree with Duke; people who have no clue what economics are running a country can have the perfect ideals, they'll never succeed. That's one of the reasons why Communism so often failed; Cḫ̩̉̉ and Fidel loathed economists and thought they knew how to handle it.

 

 

 

Well, they failed, although Cuba still is the best example of Communism in practice.

What about China

 

 

 

 

 

 

 

If your idea of Communism being more or less succesful is repression, millions of casualties, no freedom of thought and to top it a complete economic catastrophe, then yes, Mao's China was a good communist country.

 

 

 

Current China isn't Communist, although they may claim it to be still. It's more capitalist than the USA. Extreme free market, barely any regulations... Horrible. Just like West-Europe in th 19th century.

[Celt23]

 

 

It was fun to read! :D

 

 

 

 

 

 

 

HAHAAHA I lied.

 

 

 

 

 

 

 

Select my message and read!!!

 

 

 

 

 

 

 

I guess you think you're incredibly funny now?

 

 

 

 

 

 

 

Anyway, I completerly agree with Duke; people who have no clue what economics are running a country can have the perfect ideals, they'll never succeed. That's one of the reasons why Communism so often failed; Cḫ̩̉̉ and Fidel loathed economists and thought they knew how to handle it.

 

 

 

Well, they failed, although Cuba still is the best example of Communism in practice.

What about China

 

 

 

 

 

 

 

Yawn

 

 

 

 

 

 

 

Stalinism and Maoism and just about every communist state's ideology after 1924 has NOT been communism. It's called state capitalism/totalitarianism, the government controls EVERYTHING.

 

 

 

 

 

 

 

This is communism:

 

 

 

 

 

 

 

http://www.cpusa.org/article/static/511/

 

 

 

 

 

 

 

A true communist state is when the PEOPLE control the economy, not the government (as in the USSR, China and Cuba) or capitalists.

 

 

 

 

 

 

 

Marx would of been horrified at these countries.

 

 

 

 

 

 

 

Did anyone say socialism doesn't work? Look at NASA, The Postal Service, the Armed Forces, and FDR's new deal, that's socialism.

[BlueLancer]

Just a correction, Yugoslavia doesn't exist anymore nor does it consist of Serbia & Montenegro. Even those 2 states are now separated 8-)

 

 

 

 

 

 

 

Bottom line is - printing money is an artificial way of funding your budget deficit and will ruin an economy if it is overdone.

 

 

 

 

 

 

 

That's true because Tito's Yugoslavian currency had no gold, silver, or any backing at all. That essentially makes money just worthless paper.

 

 

 

 

 

 

 

Still, look at the US. The Federal Treasury hasn't had gold backing for years for the billions of new bills they're printing out, but people have big trust in the economy; It wont collapse soon.

 

 

 

 

 

 

 

Yugoslavia on the other hand didn't have much of an economy. The main operative businesses were owned by the state and were large power plants, shoe factories, etc. producing all the needs to the people. What's there to believe in?

[Duke_Freedom]

Still, look at the US. The Federal Treasury hasn't had gold backing for years for the billions of new bills they're printing out, but people have big trust in the economy;

 

 

 

 

 

 

 

Yes, a backing for a currency is not 'necessary' to keep the currency stable and printing money to a certain extend is even better if you want to keep a stable economy as well (as a "correction" for population growth and an increase in overall wealth). The most important of a currency remain the price stability, wide acceptance and easy tradability. The US still has some gold though.

 

 

 

 

 

 

 

It wont collapse soon.

 

 

 

 

 

 

 

Not everyone is so sure about that. Either way, if the dollar collapses it won't end up in such extreme rises anyway. In a way, the dollar has already lost a lot of ground though:

 

 

 

 

 

 

 

EUR/DOL 2001 = ~0.85

 

 

 

EUR/DOL now = ~1.30

 

 

 

 

 

 

 

Besides, America has a huge trade deficit that grew extremely throughout the past years.

 

 

 

 

 

 

 

Not to mention the well-known debt clock and the future liabilities the government has with regards to the social security and medicare.

[dusqi]

Duke (and other 'serious' economists), what is your opinion as to what would happen if China lost faith in the dollar and decided to convert 80% of its current dollar currency reserves to other currencies (Euro, sterling, yen, etc.)?

 

 

 

 

 

 

 

I've been having an amateur interest in this question since learning that China has about 1.4 trillion dollars worth of reserves, financed through its trade surplus... and wondered therefore how much 'power' China has over the US.

[Tigra00]

Duke (and other 'serious' economists), what is your opinion as to what would happen if China lost faith in the dollar and decided to convert 80% of its current dollar currency reserves to other currencies (Euro, sterling, yen, etc.)?

 

 

 

 

 

 

 

I've been having an amateur interest in this question since learning that China has about 1.4 trillion dollars worth of reserves, financed through its trade surplus... and wondered therefore how much 'power' China has over the US.

 

 

 

 

 

 

 

I'm no expert...Infact, I know nothing of the subject, but I'm sure it would not be good. :P

 

 

 

 

 

 

 

The Euro has apparenty been catching up to the dollar a lot in recent years, and I've wondered what will happen if 1 Euro is ever > 1 Dollar.

[BlueLancer]

Duke (and other 'serious' economists), what is your opinion as to what would happen if China lost faith in the dollar and decided to convert 80% of its current dollar currency reserves to other currencies (Euro, sterling, yen, etc.)?

 

 

 

 

 

 

 

I've been having an amateur interest in this question since learning that China has about 1.4 trillion dollars worth of reserves, financed through its trade surplus... and wondered therefore how much 'power' China has over the US.

 

 

 

 

 

 

 

Iran already did this, like predicted years ago. They are only doing oil transactions in the Euro currency, which is obviously harmful for the US because should it buy oil from them, they need to buy european currency.

 

 

 

 

 

 

 

China can use their gigantic foreign reserves as a political weapon against the US, by threatening to convert the money into euro-spendable cash. Nearly 1.5 trillion dollars is a massive amount of money, about 15% of the whole US economy.

 

 

 

 

 

 

 

I'd say the price of the dollar would sink maybe by a fifth or more if China publicly announced they no longer do transactions in dollars nor keep reserves in american dollars.

[Duke_Freedom]

The Euro has apparenty been catching up to the dollar a lot in recent years, and I've wondered what will happen if 1 Euro is ever > 1 Dollar.

 

 

 

 

 

 

 

The numbers above said 1 euro = $ 1.30 already. :P

 

 

 

 

 

 

 

As BlueLancer said, Iran and various other oil countries have already been getting rid of their dollars and exchanging them for euro's. The effect of that is relatively small to the impact China would have though.

 

 

 

 

 

 

 

It is not a joke that if China announced to not buy any new dollars (saying nothing about selling their current reserves yet) that would already have considerable consequences for the dollar. Japan holds similar huge dollar reserves as well by the way.

 

 

 

 

 

 

 

Having seen and read a lot about this I would say the dollar has no other way to go then downwards in the long run though. As a result of the weakening dollar the past decade, things like oil and gold have been rising quite steadily too.

[Devilsdragon]

The Euro has apparenty been catching up to the dollar a lot in recent years, and I've wondered what will happen if 1 Euro is ever > 1 Dollar.

 

 

 

 

 

 

 

The Euro is worth more than a dollar right now...

 

 

 

 

 

 

 

And I bet Yugoslavia could have saved a [cabbage] load of money if they didn't need to use so much paper on that money they were printing

[____]

And it's only a matter of time before the Canadian Dollar passed the US Dollar value.

 

 

 

 

 

 

 

Also, if the USD falls 1/5 from a major reserver switching to the Euro, Australia and NZ would get hikes of 20-25c; enough to almost square them off with the USD.

 

 

 

 

 

 

 

Export industry would boom :thumbsup:

[Solidus_77]

As duke freedom said, that government hasn't a clue about economic theory, not only because they started printing money like that but also when they tried to "fix" the problem with ridiculous solutions like price controls.

 

 

 

 

 

 

 

Duke (and other 'serious' economists), what is your opinion as to what would happen if China lost faith in the dollar and decided to convert 80% of its current dollar currency reserves to other currencies (Euro, sterling, yen, etc.)?

 

 

 

 

 

 

 

In my opinion, they would hurt themselves. The reason why China is willing to give such big loans to the US is because they know the US imports a lot (hence why they have a huge trade deficit) and so if the US can't import as much, then the US will stop importing as much Chinese goods which hurts the Chinese ballance of payments. China also has economic growth problems of it's own to deal with which, ironically, the US could help them with

[Duke_Freedom]

In my opinion, they would hurt themselves. The reason why China is willing to give such big loans to the US is because they know the US imports a lot (hence why they have a huge trade deficit) and so if the US can't import as much, then the US will stop importing as much Chinese goods which hurts the Chinese ballance of payments. China also has economic growth problems of it's own to deal with which, ironically, the US could help them with

 

 

 

 

 

 

 

I've read this arguement too often in all the articles that I have read about it and I personally believe it to be an extreme circular reasoning. In short the arguement states that it is best for everyone that the dollar does not crash because that will lead to a huge drop in the export of other countries.

 

 

 

 

 

 

 

I've once heard a nice analogy to the situation which I find to be very applicable here: Assume we have 4 people on an island. An american, a chinese, an european and a japanese. Now they divided the tasks on the island: the japanese man catches fish, the european hunts wild beasts and the chinese man gathers wood for a fire to cook the food on. The american? His task is to eat the food that was gathered and to leave just enough food so that the others don't starve of hunger.

 

 

 

 

 

 

 

Instead of arguing that the japanese, chinese and european wouldn't have a job without the american, the right conclusion would be that they should throw the american in the sea and consume their products themselves - they would be much better off in that case.

 

 

 

 

 

 

 

The point is, money doesn't come out of nowhere. What noone really seems to realize that the deficits of America are eventually going being paid by someone - and probably not the Americans themselves. If the dollar does eventually crash, the huge loans that America has will be worth much less than what they were worth when we lend them the money. All of America's loans are noted in dollars - if the dollar price falls, the one who loaned the money will loose money when the loan is payed back.

 

 

 

 

 

 

 

My opinion? Non-american countries have made (and are still making) a huge mistake by lending America more and more money, noted in it's own currency, the dollar. They are taking a huge and irresponsible valuta risk and will eventually pay the cost of doing so.

[Solidus_77]

I've read this arguement too often in all the articles that I have read about it and I personally believe it to be an extreme circular reasoning. In short the arguement states that it is best for everyone that the dollar does not crash because that will lead to a huge drop in the export of other countries.

 

 

 

 

 

 

 

The idea behind the argument is that the flow goes both ways, in other words there is a return. China is not dependant on the dollar, but in this case the return is advantageous. You can imagine that the goods exported from the US to China have heavy tariffs on them, and my guess is that this is just to increase revenue

 

 

 

 

 

 

 

I've once heard a nice analogy to the situation which I find to be very applicable here: Assume we have 4 people on an island. An american, a chinese, an european and a japanese. Now they divided the tasks on the island: the japanese man catches fish, the european hunts wild beasts and the chinese man gathers wood for a fire to cook the food on. The american? His task is to eat the food that was gathered and to leave just enough food so that the others don't starve of hunger.

 

 

 

 

 

 

 

Interesting analogy, however the scenario we are looking at is a bit different. The 3 people are not on the verge of starvation, but they are choosing to give their food to the american because the american consumes their food at a cost. Without him, the food will just pile up.

 

 

 

 

 

 

 

Sorry if the analogy doesn't follow, the point is that the other countries can still prosper without the need to supply the US, however they choose to do so because it's worth it for them.

 

 

 

 

 

 

 

Instead of arguing that the japanese, chinese and european wouldn't have a job without the american, the right conclusion would be that they should throw the American in the sea and consume their products themselves - they would be much better off in that case.

 

 

 

 

 

 

 

Economies of scale. This is one of the gains from international trade where the firms do not have enough domestic demand and seek demand on a worldwide scale. This is what China is looking for when they let America borrow loans. They have plenty of resources to keep going themselves and would probably do fine, but they would rather export even more to the US which increases their GDP. Your theories are very valid in my opinion, but they do not accomplish this objective, in fact you seem opposed to the idea of world trade.

 

 

 

 

 

 

 

World trade, in today's world, has become crucial. International trade is practiced by many countries to achieve objectives such as the theory of comparative advantage, spread of modern technology and as I said earlier, economies of scale. In the world, many countries depend on each other and so if the US starts to fall appart, all countries trading with it will be affected. But that is unlikely to happen, same for the scenario of China, Japan and Europe stopping all trade with the US (which would be the equivalent to "throw[ing] the American in the sea" in your analogy), they would lose the benifits from trade and I don't think the WTO would approve of such radical desisions on trade (These countries are all members of the WTO)

 

 

 

 

 

 

 

The point is, money doesn't come out of nowhere. What noone really seems to realize that the deficits of America are eventually going being paid by someone - and it are probably not the Americans themselves. If the dollar does eventually crash, the huge loans that America has will be worth much less than what they were worth when we lend them the money. All of America's loans are noted in dollars - if the dollar price falls, the one who loaned the money will loose money when the loan is payed back.

 

 

 

 

 

 

 

I agree with that, it shows that the people giving the loan, (mostly China) would lose all that money. Another reason why it's in China's best interest to continue giving loans to the US.

 

 

 

 

 

 

 

There was a very intersting article in the Financial Times about how the US and China could greatly benifit from collaborating. Unfortunately I only have the first part online:

 

 

 

 

 

 

 

A global mission for China and America

 

 

 

 

 

 

 

By Robert Zoellick

 

 

 

 

 

 

 

Published: January 22 2007 21:25 | Last updated: January 22 2007 21:25

 

 

 

 

 

 

 

America and China need to develop an agenda as mutual stakeholders in the world economy. The new strategic economic dialogue and the energy group launched by China with the US, India, Japan and South Korea supply the means to do so.

 

 

 

 

 

 

 

So far the media focus has been on the appreciation of ChinaÃÆââââ¬Å¡Ã¬Ã¢ââ¬Å¾Ã¢s currency. Progress on this issue will establish a sense of fair competition. Yet the Sino-American agenda needs to be broader. Some steps can prepare the way for ChinaÃÆââââ¬Å¡Ã¬Ã¢ââ¬Å¾Ã¢s transition to a flexible exchange rate. Others lay the foundation for two important economies to advance and share in global prosperity.

[Tigra00]

 

The Euro has apparenty been catching up to the dollar a lot in recent years, and I've wondered what will happen if 1 Euro is ever > 1 Dollar.

 

 

 

 

 

 

 

The Euro is worth more than a dollar right now...

 

 

 

 

 

 

 

And I bet Yugoslavia could have saved a [cabbage] load of money if they didn't need to use so much paper on that money they were printing

 

 

 

 

 

 

 

Oh.

 

 

 

 

 

 

 

I hadn't heard. :lol:

 

 

 

 

 

 

 

Guess nothing bad happened. I'm surely not begging on the streets! :P

 

 

 

 

 

 

 

...Yet.

[Duke_Freedom]

Interesting analogy, however the scenario we are looking at is a bit different. The 3 people are not on the verge of starvation, but they are choosing to give their food to the american because the american consumes their food at a cost. Without him, the food will just pile up.

 

 

 

 

 

 

 

Hm, but especially the people in China are not that wealthy. Ofcourse the analogy shouldn't be taken as litteral in that people are starving because of it, but the point is that they are living below their standards to allow americans to live above their standards.

 

 

 

 

 

 

 

because it's worth it for them.

 

 

 

 

 

 

 

Because they think it is good for them, which is what I am arguing against.

 

 

 

 

 

 

 

Economies of scale. This is one of the gains from international trade where the firms do not have enough domestic demand and seek demand on a worldwide scale. This is what China is looking for when they let America borrow loans. They have plenty of resources to keep going themselves and would probably do fine, but they would rather export even more to the US which increases their GDP. Your theories are very valid in my opinion, but they do not accomplish this objective, in fact you seem opposed to the idea of world trade.

 

 

 

 

 

 

 

The problem is that this lending of money goes on not in their own currency - which would be normal to hedge against the valuta risk - but in the foreign currency. I am not against world trade, I am against funding the overconsumption and "living above your standard" from americans and I say that it is very possible that non-americans will eventually pay the cost of that, because the money we lend out will be worth less when it is paid back. I am also saying that non-american countries as a result may not profit from this by artificial boost in their export at all in the end.

 

 

 

 

 

 

 

All of America's loans are noted in dollars - if the dollar price falls, the one who loaned the money will loose money when the loan is payed back.

 

 

 

I agree with that, it shows that the people giving the loan, (mostly China) would lose all that money. Another reason why it's in China's best interest to continue giving loans to the US.

 

 

 

 

 

 

 

Why don't you see the circular reasoning in this though? They are not solving the problem - which is that America is living above its standards - but only making the problem worse, by continuing to expand their dollar positions. America will care less than us if their dollar collapses, because it will both make their debt expressed in products smaller and because they know that it is very likely that the whole world will end up in a recession too.

 

 

 

 

 

 

 

Reason enough to stop the process from getting worse and worse. Ofcourse this does not mean "all countries sell your dollar reserves today" with all the disastrous effects that would bring with itself.