Currency Valuation-Currency Manipulation, What Are They?

UsMenTalkBy UsMenTalkApril 11, 20207 Minutes

The value of money, a country’s currency, is determined by the market demand for it, just like the demand for goods, services, your home, stocks, etc. There are 3 ways to measure the value of the US dollar. The first is how much the dollar will buy in a foreign currency’s equivalent like the Chinese Yuan, the Indian Rupee, the Mexican Pesos, etc. That’s what the exchange rate measures. There are apps today that will tell you what the US dollar equivalent is in virtually every country’s currency. Forex traders on the foreign exchange market determine exchange rates. They take into account supply and demand, and then factor in their expectations for the future. And just like stocks, the value of money fluctuates throughout the trading day.

The second method is the value of Treasury notes. They can be converted easily into dollars through the secondary market for Treasury’s.
The third way is through foreign exchange reserves. That is the amount of dollars held by foreign governments. The more they hold, the lower the supply. World governments hold and buy US dollars and treasury’s because it’s the most stable currency in the world. That makes U.S. money more valuable. If foreign governments were to sell all their dollar and Treasury holdings, the dollar would collapse and U.S. money would be worth a lot less.
What’s interesting to note here is that China is the only country in the world that sets its own currency equivalent to the US dollar. We’ll talk more about this in a minute.

To see a simple difference in the value of the US dollar compared to two other currencies, (See chart below) let’s look at the cost of the same dinner at the same restaurant, JIMMYS STEAK HOUSE, but where they are each located in 3 different countries.

As you can see, depending upon the value of the dollar at the time you had dinner, the same meal cost you less money in US dollars in China ($30) versus costing you more US dollars for the same dinner in England ($74).

Now let’s take a look at currency manipulation and what exactly it is does for whom and to whom.

Currency manipulation is where a foreign government, like China, India etc., who is also a trading partner of the US, will artificially lower the value of their currency. As an example only, let’s pretend that the government of China decides that instead of 7 Yuan equaling $1 USD, it wants to make it so that 10 Yuan equals $1 USD.

Lets also pretend that a US company was buying baseball hats from a Chinese maker and that they were buying them for 7 Yuan, or $1 USD apiece. And let’s also assume that they are buying 1000 hats and that it cost them $1000 USD. This transaction is called an export of China (The hats being sent to the US) and an import of the US (the hats coming into the US) and goes into the export column on the Chinese governments balance sheet and an import on the US governments balance sheet.

The minute that the Chinese government increases the number of Yuan equal to the USD, from 7 Yuan to 10 Yuan, which is now what you get for $1 USD, and assuming the US company can still buy that same hat for 7 Yuan a piece, the US company can now buy 1429 hats for their same $1000 dollars. (10 Yuan/7 Yuan)

This weakens the value of the Chinese Yuan and makes it more expensive for Chinese companies to buy products from the US and abroad. It will also cost China more Yuan to pay to the US company for the same product they were buying. But conversely, it’s even better for US companies and other companies around the world to buy products from China because now they get more product for the same money. For the US, this means US imports will be increasing and Chinese exports will be increasing.

So, what’s the problem with this? It would give China an unfair and artificial world-wide competitive trading advantage in that they will be exporting way more goods than they would be importing. The more a country can export than they import with every other country is the most desirous goal for that country. But there must be balance in the world which requires fairness and a free market to determine that.

This unfair and unethical manipulation is also used to shrink trade deficits (the difference between imports and exports) for the country that is manipulating their currency, and it helps reduce the cost of interest payments that that country pays out.

OK guys, I hope this brief explanation brought a little bit more meaning and understanding to all of you. Please share it with friends if you found it helpful and do let me know your comments as well. Also, if there’s other topics you want me to discuss or do a video on, just let me know that too. Cheers to all of you!