1.

The United States has strongly urged China to revalue the Yuan to as
much as 20% or more. Explain why the US wants a much stronger Yuan.
Why is the Chinese government rejecting the call?
Some of the main reasons for the US wanting a stronger Yuan have been explained by others,
like the unemployment problem, weak economic growth, and trade deficit (estimated at $260
billion in 2007). One according to me is also being the rising current account deficit. As one
of the measures suggest by our group presentation to reduce the current account deficit was
the revaluation of Yuan to as much as 40%. As many US economists feel that the currency is
undervalued as much as 40%, making Chinese exports to the United States cheaper and U.S
exports to China more expensive. They say that gives Chinese firms an unfair price
advantage, takes jobs away from other countries and adds to global financial distortions.

For countries such as US that are spending a lot more abroad than they are taking in, the
current account is the point at which international economics collides with political reality.
Tension between the United States and China about which country is primarily responsible
for the trade imbalance between the two has thrown the spotlight on the broader
consequences for the international financial system when some countries run large and
persistent current account deficits and others accumulate big surpluses.
(Source:http://www.imf.org/external/pubs/ft/fandd/2006/12/basics.htm)

The current account can be expressed as the difference between national (both public and
private) savings and investment. Therefore, it reflects a low level of national savings relative
to investment or a high rate of investment, caused by reckless fiscal policy or a consumption
binge.

It is interesting to note what Nidhi said, that the revaluation of Yuan will not solve the
problem. As it is based on the weak assumption that costlier Yuan will reduce the exports and
increase jobs in US. Neglecting the fact that the Chinese goods will always be cheaper than
US goods and where will the money come to pay for the costlier US goods, in order to
maintain a high standard of living.

However, the relationship is more complex. First, an increasing level of Chinese exports is
from foreign-invested companies in China that have shifted production there to take
advantage of China’s abundant low cost labor. Second, the deficit masks the fact that China
has become one of the fastest growing markets for U.S. exports. Finally, the trade deficit with
China accounted for 26% of the sum of total U.S. bilateral trade deficits in 2006, indicating
that the overall U.S. trade deficit is not caused by the exchange rate policy of one country, but
rather the shortfall between U.S. saving and investment.

China’s concern over revaluing the Yuan

Chinese officials argue that its currency policy is not meant to promote exports or discourage
imports. They claim that China adopted its currency peg to the dollar in order to foster
economic stability and investor confidence, a policy that is practiced by a variety of
developing countries. Chinese officials have expressed concern that abandoning the current
currency policy could spark an economic crisis in China and would especially be damaging to
its export industries at a time when painful economic reforms (such as closing down
inefficient state-owned enterprises and laying off millions of workers) are being
implemented. In addition, Chinese officials also appear to be worried about the rising level of
unrest in the rural areas, where incomes have failed to keep up with those in urban areas and
public anger has spread over government land seizures and corruption. Chinese officials
contend that appreciating the currency could reduce domestic food prices (because of
increased imports) and agricultural exports (by raising prices in overseas markets), thus
lowering the income of farmers and further raising tensions.

Coming to the effect on the economies of both the countries with

revaluation of Yuan:
Implications for China’s Economy

In the short run, a revaluation of the Yuan could reduce aggregate spending in China by
raising imports and reducing exports. Whether this would be desirable depends on the current
state of the Chinese economy. One school of thought argues that the Chinese economy is
currently overheating, and revaluation would help place it on a more sustainable path and
prevent inflation from rising. Other argues that there is a large pool of underemployed labor
in rural China that the undervalued Yuan is helping to absorb. In this view, revaluation could
be economically and socially disruptive.

In the long run, it will affect the exports in china, as its economy is overly dependent on fixed
investment and net exports for economic growth rather than the domestic consumption. This
could lead to long term economic risk and instability.

Implications for the U.S. Economy

This would boost U.S. exports and the output of U.S. producers who compete with the
Chinese. The U.S. bilateral trade deficit would likely decline (but not necessarily disappear).
At the same time, the Chinese central bank would no longer purchase U.S. assets to maintain
the peg. U.S. borrowers, including the federal government, would now need to find new
lenders to finance their borrowing, and interest rates in the United States would rise. This
would reduce spending on interest-sensitive purchases, such as capital investment, housing
(residential investment), and consumer durables. The reduction in investment spending would
reduce the long-run size of the U.S. economy.

None of the solutions guarantee that the bilateral trade deficit will be eliminated. China is a
country with a high saving rate, and the United States is a country with a low saving rate; it is
natural that their overall trade balances would be in surplus and deficit, respectively.
If China can continue its combination of low-cost labor and rapid productivity gains, which
have been reducing export prices in Yuan terms, its exports to the United States are likely to
continue to grow regardless of the exchange rate regime.

U.S.-China Trade and Manufacturing Jobs

In the manufacturing sector, where 2.7 million factory jobs have been lost since July 2000.
While job losses in the U.S. manufacturing sector have been significant in recent years, there
is no clear link between job losses and imports from China. First, only some manufacturers
export to China or compete with Chinese imports. Second, the economic recession and
subsequent “jobless recovery” that ended in August 2003 reduced employment across the
entire economy. Since then, manufacturing output has reached an all-time high;
manufacturing employment has fallen over this time because of productivity growth, not a
decline in output. Third, the growing trade deficit has not been limited to China; the overall
trade deficit is still increasing. Finally, there is a long-run trend that is moving U.S.
production away from manufacturing and toward the service sector.

Thus, inducing China to appreciate its currency would likely benefit some U.S. economic
sectors, but would harm others, as well as consumers. The trade deficit with China has not
prevented the United States from reaching full employment. In addition, U.S. trade with
China is only one of a number of factors affecting manufacturing employment, including
increased productivity growth, employment shifts to the service sector, and the overall trade
deficit. It is also not clear to what extent production in certain industrial sectors has shifted to
China from the United States, as opposed to shifting to China from other low-wage countries,
such as Mexico, Thailand, and Indonesia. The extensive involvement of foreign multilateral
corporations in China’s manufactured exports further complicates the issue of who really
benefits from China’s trade, as well as the implications of a rising U.S. trade deficit with
China (since a large share of U.S. imports are coming from foreign firms, including U.S.
firms, that have shifted production from one country to China). Thus, there is considerable
debate over what policy options would promote U.S. economic interests since changes to the
current system would produce both winners and losers in the United States (as well as in
China).

References: China’s Currency: Economic Issues and Options for U.S. Trade Policy by
Wayne M. Morrison and Marc Labonte.

2. Greece Financial Crisis:

Why is Greece in such a mess?

For years, Greece has been spending money it doesn't have, and its rising level of debt has
placed a huge strain on the country's economy. Cheap lending rates allowed the government
to borrow heavily and go on a spending spree during good times, by practically doubling the
public sector wages, including an expensive Olympics.
However, as the money flowed out of the government's coffers, tax income was hit because
of widespread tax evasion and failure to implement financial reforms left Greece badly
exposed, as it was ill-prepared to cope. This revealed debt levels and deficits that exceeded
limits set by the eurozone.

National debt, put at €300 billion ($413.6 billion), is bigger than the country's economy, with
some estimates predicting it will reach 120 percent of gross domestic product in 2010.

Greece's budget deficit, last year was 13.6% of its GDP. This is one of the highest in Europe
and more than four times the limit under eurozone rules.

Greece's high levels of debt mean investors are wary of lending it more money, and demand a
higher premium for doing so.

This is particularly troublesome as Greece must refinance more than 50bn euros in debt this
year. It will also have a negative impact on the other euro members like Ireland, Portugal and
Spain who are soon to follow.

Greece has started slashing away at public spending and has implemented austerity measures,
aimed at reducing the deficit by more than €10 billion ($13.7 billion) i.e. 8.7% of its GDP in
2010, and to less than 3% by 2012. It has hiked taxes on fuel, tobacco and alcohol, raised the
retirement age by two years, imposed public sector pay cuts and applied tough new tax
evasion regulations. It is also borrowing 110 billion euros (£95bn) from other EU countries
and the International Monetary Fund.

What Should Greece do?

1. Could Greece just leave the euro?
No. It’s not a solution, as it would cause huge ruptures in the financial markets as
investors would fear other nations would follow, potentially leading to the break-up of
the monetary union itself, also there is no legal mechanism for countries to leave the
single European currency.

2. Bailout packages - The EU hopes that its bailout will reassure the money markets
that their cash is safe.
However, that depends on Greece getting control of the situation and proving it can
make the cuts needed, also international bailout in the eurozone would prove too
embarrassing for Europe. Other nations in the eurozone, however, have
appeared less eager to dismiss IMF support.

3. Encourage reallocation across sectors 

Acceleration of other structural reforms will help boost productivity and avoid
extreme wage cuts. Broader measures to increase competition in backbone services
such as transportation, finance, communications, and energy will help lower their
prices and encourage investment in growth sectors such as information technology
 and clean energy. Forcing a restructuring of savings banks that underpin the real
estate market will set the stage for a faster liquidation of the vacant housing stock and
a sharper fall in rents and housing prices.

4. Demand a coordinated effort across Europe

There should be a combined effort from all the European countries and work towards
a more stable Euro.
All the European nations should come together and work towards a more stable Euro.

3. George Soros - Learning’s:

George Soros is arguably the world’s most well-known speculator and the financial
wizard who made billions of dollars speculating on the markets. After making his
fortune, Soros set up foundations and has dispensed large amounts of money to
worthy causes. He is also the author of many books, reports and articles.

Soros attributes his financial success to this philosophy. He was able to see how other
investors misunderstand the world, they follow financial indicators as if they reflect
reality rather than a combination of reality and perception and he believes in insight.
He says that neoclassical economics is based on the idea that markets tend toward
equilibrium and that this is a fundamental error. Markets would only tend toward
equilibrium if investors looked solely at information about the actual economy, not at
others' beliefs and behaviour.

Soros distinguishes between two ways of interacting with the world which he calls the
cognitive function and the manipulative function. The cognitive function is about
understanding the world, whereas the manipulative function is about changing the
way the world operates. Soros previously referred to the manipulative function as the
participating function but after observing some events, such as the Bush
administration's deceptions in promoting the 2003 invasion of Iraq, in which people's
beliefs were altered to achieve a political end. He prefers the expression
"manipulative function".

What Soros says about cognitive and manipulative functions sounds simple in
exposition, but it is not that easy to grasp the implications for social research. Those
willing to grapple with the ideas may find some provocative insights and useful
applications.

References: http://www.bmartin.cc/pubs/comments/0910Soros.html