Friday, December 22, 2006

Fixed or Relative?

Should the US worry more about China's current account surplus or that of the oil producing Gulf countries (GCC)? Let the US worry about what it wants. But it seems the US is more worried about China as evidenced by the US's secretary of treasury Henry Paulson's visit to China lately. The Economist magazine in its December 9th, 2006 issue had a differing opinion-by the way The Economist does not like to call itself a magazine its too demeaning, rather it calls itself a newspaper or news publication.

The Economist argued that the US should be more worried about the surpluses of the GCC countries. See the counterpart to the surplus is America's huge deficit which it is actively trying to reduce. While China's surplus is estimated at $200 billion, the oil-exporting countries are expected to run total current account surplus of $500 billion this year according to The Economist.

The main culprit of this surplus is the undervalued Chinese currency, in America's view. The undervalued currency encourages imports from China and restricts exports to it. While the US has succeeded in making China push up its currency lately, GCC countries still peg their currency to the dollar. This resulted in GCC currencies being undervalued while oil prices are soaring!

The article concluded that it is best for GCC countries as well as the world if the dollar peg was abandoned and instead shifted to currency basket.

The moral question for the day is: should our values be fixed or relative? Should they be fixed according to religion or some sort of moral code or change according to circumstances? It seems the argument in economics runs against fixed. I don't have the answer to that. But you can worry about what you want. In the end you are probably worrying about the wrong thing!

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