A Ton of Gold

If a ton of gold would be worth one cent tomorrow, would you buy gold? Due to the recession in the United States, the exchange rate of the American Dollar in relation to other currencies has been declining, which can benefit the United States. Meanwhile, according to an exchange rates website, the currency exchange rates for Chinese Yuan and Japanese Yen have been gradually increasing by 7 percent in 2007 and 2008. Future problem may occur if something is not done to regulate the exchange rate with the government intervention. Without understanding the short and long-term effects of exchange rates, we are unlikely to find solutions for the growing federal deficit and the national debt in the United States.
The exchange rates are described by economists to be one of the non price determinants of demand; however, they are distinctive from other factors in that they can have nothing to do with “invisible hand,” which economist Adam Smith talked about in his book, an Inquiry into Nature and Causes of the Wealth of Nations. That is, government can get involved in determining the value of its currency against those of other nations, so that exchange rates can be adjusted in the way of giving the nation a profit.
For a short-term effect, the exchange rate has succeeded in regulating exports and imports. The exchange rate has raised the importing rate with China and Japan because it offered the United States advantages in Chinese and Japanese markets, where the United States has a considerable amount of its national debts. China and Japan are willing to buy more goods and services from the United States because, like one cent for a ton of gold, American goods and services became cheaper. Also, due to the exchange rate, Chinese and Japanese products become expensive in the United States, giving domestic products competitive positions in the domestic market. However, in a long run, it should be noticed that unfairly advantaged trade with China and Japan can create trade war along with reduced resources that have come from China and Japan.
In addition, because the United States currently does not formally regulate its exchange rate, it is possible that in the future, the United States will fail to attract foreign funds, which is extremely necessary to boost the stagnated economy in the United States. In the foreign currency exchange market, the highest increases in values between 2007 and 2009 were in the Chinese Yuan and Japanese Yen, followed by the American Dollar and Hong Kong Dollar. Given the notion that the recession will be over eventually and the exchange rate will come back to its previous equilibrium, foreign investors will not be interested in the United States. Instead, they will invest their money in the countries whose currency exchange rates are not yet balanced and are in a position to increase in value. Simon Romero and Alexei Barrionuevo illustrated in New York Times on April 15th 2009 that “. . . China is stepping in vigorously, offering countries across the region large amounts of money. . .” These large amounts of money include 32 billion dollars consisting of 10, 10, and 12 billion dollars for Argentina, Brazil, and Venezuela, respectively.
Furthermore, the exchange rate can leave the next generation with more national debt as the inflow of foreign funds will cause the outflow of them when the exchange rate will return to equilibrium. For example, when it comes to gold, people try to buy at the cheapest price and sell at the highest price. When the American Dollar is relatively cheaper for China or Japan to purchase, an inflow of foreign capital can be expected. However, when the American Dollar gains its value again after the recession, those who have put money into the United States will most likely withdraw it, leaving America with more expensive national debt. The profit that foreign investors make will be the loss of the United States later. Conn Carroll, in his article in American Leadership on March 13th 2009, states that “China does hold $1.946 trillion in foreign-exchange reserves. . .” When the exchange rate comes back to its previous equilibrium, the next generation will have to pay off more than what we lend.
The primary solution to keep this from happening is to bring the exchange rate back to its previous equilibrium by about 4 percent each year, which is about the average for prime interest rate. The percent is an important factor because if the percentage is less than the interest rate, it no longer interests foreign investors, thereby encouraging them to invest in other countries. If the change is much higher than 4 percent, investors will withdraw right at the point where it almost reaches its previous equilibrium. Therefore, gradually adjusting the rate back into balance is a viable solution. When the percent is changing continuously while interesting foreign investors, the foreign capital can be held until the recession is over.
Before the United States stabilizes the exchange rates with China and Japan, it should stabilize exchange rates with other countries beforehand. If values of Chinese Yuan or Japanese Yen are stabilized before those of other countries, foreign funds will not come to the United States. The reason is that when the exchange rate of the American Dollar is stabilized, goods and services are more expensive than before, making foreign investors wary of investing in the United States. Rather, the capital in the United States will be transferred to other countries whose exchange rates have not yet stabilized. By adjusting the values of other currencies before fixing those with Japan or China, the United States can recruit and expect more inflow of foreign funds to boost the economy.
The current exchange rate in favor of the United States can provide something like profits in a short-term. Meanwhile, long-term effects of the current exchange rates outweigh the short-term benefit. If we do not want to give the next generation more expensive national debt, it is the time for the United States government to regulate currency exchange rates. The way of paying off national debts is not to take advantage of exchange rates, but to gain profits in foreign markets by competing with other countries. Otherwise, the United States will not have the ability to finance its large national debt as easily. Without being economically strong, there seems to be no solution.

Work Cited

Carroll, Conn. “China, Debt, and Influence.” American Leadership. 13 Mar. 2009
Romero, Simon. "Deals Help China Expand Sway in Latin America." NYTimes. 15 Apr. 2009
http://www.x-rates.com/