The price of tea in China

Recently, the Chinese government announced that they will no longer peg the value of their currency directly to the US dollar. Instead they will allow it to float by a given percentage either way within strictly defined limits.

So, how does this affect the price of tea in China?

It doesn't. But it does affect the price of Chinese tea in the US. Specifically, the value of the Chinese Yuan has been kept artificially low with respect to the dollar to encourage US dollars to flow into China. Basically, one buys cheap Yuans with dollars, and uses them to pay for Chinese goods. This means that with a stronger Yuan, the price of Chinese tea and other Chinese goods may rise slightly, giving a thin advantage to American made goods over imports. However, the US government is still not satisfied, the US was hoping that China would completely deregulate the value its currency and allow it to settle to whatever value it would on the free market. Obviously, the US is somewhat appreciative of this first step, but still deeply disappointed that China didn't go all the way.

So, I'm sure that the Bush administration is discussing what to do about this behind closed doors.

Bush: Those Chinese sons-of-bitches! After all the business we've sent their way, this is how they repay us?!

Rove: Well, we could get even.

Bush: How?

Rove: Well, I could leak the name of a US operative in China to the press, that person gets captured and executed in China and this creates a huge international ruckus. They look like the bad guys and suddenly nobody wants to do business in China for fear of a hostile government.

Bush: No, we're still cleaning up the mess from the last time we tried something like that.

Rove: I got it! We peg our currency to their currency where we want it. Then they'll have to give in.

Bush: Karl, you're a genius. Who's my turdblossom?

Rove: I am.

Bush: Who's my turdblossom?

Rove: I am, sir.

Bush: Hehehehe. Get Alan Greenspan on the phone. If he gives us any shit, we'll blackmail him somehow.

The next day, the headlines read, "US dollar pegged to Chinese currency." Down in the article, the text mentions that this will give us a competitive edge over Chinese goods and that the exchange rate is fixed at five Yuan to one dollar. Of course, such a move is a fundamentally bad idea, but the Bush administration came up with it, so the lapdog corporate press instinctively goes along with it and so does everyone else. Sean Hannity instinctively hails the move as "brilliant". Limbaugh proclaims, "finally we'll beat those Chinese sons-of-bitches at their own game."

As the sun rises over China, the Chinese economic minister reads about this bold move in the Wall Street Journal.

"Checkmate!" He shouts and grabs the phone. He orders that the Yuan be pegged at eight Yuan to the dollar on the Chinese market.

As soon as this news goes live, every currency trader in the world snarfs his coffee onto his keyboard, which creates a brief bubble in the PC accessory market, and the ones that didn't have a cardiac arrest upon reading this (some of these guys are pretty high strung), immediately start trading all they can.

For every dollar, buy eight Yuan in China.

For every five Yuan, by a dollar in the US.

Net profit per round trip: $1.375

Everyone dumps their stocks to have cash to play the currency markets. The world's stock markets crash almost instantly as most of the world's currency is now being wired back and forth across the Pacific.

China starts printing Yuans like mad to keep up with demand. The US starts printing dollars like mad to keep China from gaining the upper hand. The world market value of each goes to zero almost immediately from the sudden surge in money supply. The markets of each country start using the accumulated currencies of the other to start buying up assets in the other's country wholesale. By the time its all done, the US owns everything in China, and China owns everything in the US. The result is an economic disaster that would take years to sort out. There is talk of moving the populations of each country to the other country to even out the imbalance, to restore the old world order from the opposite sides of the Pacific, but the plan quickly sours as the state governments fight over which parts of China will be within their borders. Everybody wants Beijing and Shanghai and nobody wants the outer Mongolian desert. Finally, the European Union and Great Britain both step in and buy the assets of both countries with the still solvent Euro and pound and once again Western Europe emerges as the world's dominant power. The efforts of centuries of stuggle against European imperialism evaporate overnight.