I was reading this (from a link in the gold thread) “Note: Now we are exporting some of our inflation to China as they send us goods and buy our debt.” I understand that if the current account deficit goes up, then the financial account has to balance (assuming no central bank selling reserves and stuff). But why does this result in inflation in China?
One of the disadvantages of pegging a currency to another is ‘importing inflation’.
bchadwick Wrote: ------------------------------------------------------- > I understand that if the current account deficit > goes up, then the financial account has to balance > (assuming no central bank selling reserves and > stuff). But why does this result in inflation in > China? BOP is why China is forced to buy USD? I never understood this very well… To rephrase Storko’s point, my understanding is that a devalued USD leads to a devalued Yuan and therefore higher price for goods imported.
OK, that makes sense to me. I didn’t think about it in terms of pegging the currency, but that is why China needs to buy US assets (otherwise the peg doesn’t work).