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Learning to Float

The economic and welfare costs of China’s exchange-rate policy are too high. It is time for China to consider allowing the renminbi to float freely, while reserving the right to intervene when it must, and tighten the management of cross-border capital flows.

BEIJING – Despite shaky economic fundamentals, US government securities are usually regarded as a safe haven. Whenever a crisis erupts, the value of US Treasury bonds gets a boost. Indeed, US Treasuries were among the few assets that did not decline during the global financial crisis in 2008-2009.

But the safe-haven status of US government securities is an illusion. They are safe only in the sense that no one can stop the Federal Reserve from operating its printing presses at full speed.

The market value of Treasuries depends on a wide range of factors. Now it is essentially sustained by a Ponzi scheme, with the Fed’s policy of “quantitative easing” keeping the price of Treasuries artificially high. But, at end of the day, no currency can defy the laws of economic gravity. The market price of Treasuries eventually will fall to levels dictated by US economic fundamentals.

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