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For ten years, the Chinese have maintained a fixed exchange rate of about 8.28 yuan to the dollar. As has been well documented, the US has been a great importer of Chinese goods. We take their merchandise and they take our dollars.

According to James Grant, “the dollars pile up on the balance sheet of the People’s Republic of China at the rate of $10 billion per month.” Such trends are unsustainable. At some point, the Chinese are going to have to stop acquiring dollars at the fixed rate. The yuan, it seems, is too cheap at that rate and the Chinese money supply is booming. People are eagerly swapping their dollars for yuan.

Meanwhile, money and credit are booming in China. As Grant writes, “It is therefore no accident that the Shanghai real estate market is on fire, that Chinese loan growth is burgeoning or that frightened Chinese monetary authorities have been unable to keep the lid on Chinese money-supply growth. By making the yuan too cheap, they have also, necessarily, made it too plentiful.”

The resulting artificial boom in China is no good for the Chinese. A bust follows every such boom. If allowed to float, the yuan would presumably get stronger, and some of the money flows would slow or even reverse. It may be too late for China, whose government seems just as intent on destroying their currency as American officials seem bent on destroying the dollar — whether knowingly or not.

Count the yuan dollar fiasco as just another chapter in the long saga of man’s futile struggle to master paper money. The unattainable dream is to be able to produce as much of it as possible at near zero cost and yet also have it maintain its purchasing power in the real world of things.

Murray Rothbard wrote “Governments don’t know, and don’t want to know, that the only successful fixing of exchange rates occurred, not coincidentally, in the era of the gold standard.” The reason is easy enough to understand. It worked because monetary units, like the dollar, were fixed in terms of their weight in gold. Gold has to be extracted, manufactured within the market, and cannot be created out of thin air.

But government planners don’t like gold. It ties their hands. They can’t spend so freely because they know they have to redeem their monetary issues in gold. It checks their inflating ways.

It’s easy to be depressed when you look around and see the state of monetary affairs. But, as Rothbard noted, and as the short historical vignettes above show, we have one great force in our favor. As Rothbard cheerfully noted, “Free markets, not only [in] the long run but often in the short run, will triumph over government power.” The inability of governments to maintain fixed exchange rates in the face of opposing market forces is only further proof of their impotency.

The difficulty with these time frames is structuring a trade to profit from the economic forces.

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