Chinese Economics Thread
- Thread starter Norfolk
- Start date
Do you think Yuan will appreciate against the dollar next year?
Ok. I'm not well versed in economics so can you tell me what are the drawbacks of Fed increasing interest rates and what effects does it have on US economy? Because despite China growing faster than the US, nominal GDP gap has still increased due to dollar value increasing. But clearly, there should be a drawback for this??
I think if Qatar and many other gulf states cut gas supply like 1973, it will make Chinese export boom especially in EV sector.
Hot money flows to area that have greater returns and relative stable. Dollar as the sole super currency of reserve enjoyed considerable cloud whenever the fed increases interest rate. Every time interest rate is increased by the Fed, developing countries with high leverage and relative high foreign debts would be under stress such as what happened during 1998 Asian Financial crisis.
Consequently, each time The Fed increases interest rates, many developing countries would run out dollars to procure essential imports such as oil and food which might force bankruptcy or bailout. Therefore, the value of dollar always increase during this rate cycle.
When the Fed is near at the end of the cycle, hot money leaves the US and most other countries with relative stable economies would have their currency value increases.
Consequently, each time The Fed increases interest rates, many developing countries would run out dollars to procure essential imports such as oil and food which might force bankruptcy or bailout. Therefore, the value of dollar always increase during this rate cycle.
When the Fed is near at the end of the cycle, hot money leaves the US and most other countries with relative stable economies would have their currency value increases.
So fed cannot prolong the high interest rates because it will have an adverse effect on US economy??
Just do some quick googling or ask ChatGPT for what the negative consequences are, when a country raises interest rates.
Overall, it basically imposes more cost on the economy of the country (intererst rises for regular people and business results in rising costs), which is a negative.
Oh yea, here is a copy paste of ChatGPT answer:
Raising interest rates in a country can have several negative effects, although it's important to note that the impact can vary depending on the specific economic conditions and the timing of the rate increase. Here are some of the potential negative effects:
1. **Reduced Consumer Spending**: Higher interest rates can lead to increased borrowing costs for consumers. This can result in reduced spending on big-ticket items like homes and cars, as the cost of borrowing becomes more expensive.
2. **Decreased Business Investment**: Businesses may also face higher borrowing costs, which can lead to reduced investments in capital projects and expansion. This can slow economic growth.
3. **Weakened Housing Market**: Higher mortgage rates can make housing less affordable, which may lead to a slowdown in the real estate market. Home prices may stagnate or decline, and construction activity can decrease.
4. **Negative Impact on Existing Debt**: Those with variable-rate loans or credit card debt may see their monthly payments rise, putting added financial pressure on households with existing debt.
5. **Depreciation of Asset Prices**: As interest rates rise, the present value of future cash flows of assets like bonds and stocks falls, which can lead to a decrease in the prices of these assets. Investors may experience losses.
6. **Impact on Currency Exchange Rates**: Higher interest rates can attract foreign capital, causing an appreciation of the country's currency. This can harm exports and make imports more attractive, potentially leading to a trade imbalance.
7. **Reduced Economic Growth**: Cumulatively, the factors mentioned above can lead to a slowdown in economic growth or even a recession.
8. **Impact on Government Debt**: Higher interest rates can lead to increased interest payments on government debt. This can affect government budgets and potentially lead to higher taxes or reduced government spending.
9. **Increased Defaults**: Some borrowers may struggle to meet their higher debt obligations, leading to an increase in loan defaults and non-performing loans, which can strain the financial sector.
10. **Income Inequality**: Rising interest rates can exacerbate income inequality, as those with substantial assets may benefit from higher interest income while those with high levels of debt may face financial stress.
It's important to note that central banks typically raise interest rates to control inflation and stabilize the economy. The negative effects mentioned above are usually short-term consequences that are seen as necessary trade-offs to maintain overall economic stability. Additionally, the impact of interest rate changes can vary depending on the overall health of the economy and the specifics of the rate increase.
There is nothing called a nominal GDP gap you can measure, unless it's 2 entities using the same currency. If you need to measure economy differences across different currencies, you need to account for inflation. Trying to measure 2 economies with different inflation using non-adjusted gdp is like trying to compare how fat 2 differently tall people are by only looking at weight.
Increasing interest rate in US has the possibly useful effect of directly increasing wealth among the class that has high ownership. The drawback is that it worsens living costs for the middle and lower class. If the former can balance out the losses of the latter by being able to reinvest and redistribute the wealth, it can lead to healthy growth. But if the consumer and industry sectors have become too lethargic due to constant deflation, money alone can't stimulate them, and money instead starts to accumulate uselessly in the accounts of the rich, and/or invested into ventures that don't benefit their own country.
supercat
Major
Yuan is only weak against the US dollar relatively because of Fed's rate hike. It's not weak against other key currencies such as euro and yen. There isn't real yuan (CNY) devaluation.