America's dilemma with the Yuan

The Bush Administration and the Treasury Secretary, John Snow is trying to influence the Chinese government to allow markets forces determine the exchange rate between the Yuan against the dollar. However, the Chinese government have continued to peg the Yuan with the dollar or in other words keep the exchange rate between the dollar and Yuan at constant rate regardless of the market forces. At the current moment the Chinese government inflates the value of the dollar against the Yuan by buying United States Treasure bills. By doing this it keeps costs to buy Chinese goods by United States citizen cheaper.

Downside for pegging the Yuan to the dollar for the United States

It makes it expensive for Chinese citizens to buy United States and cheaper for United States citizen to buy from Chinese. This is one of the reasons for the large trade deficit between the Chinese and United States.

Downside of unpeggin the Yuan

If the Yuan was to be unpeg from the dollar there would be cause an rise in liquidity the United States economy. Since by pegging the Yuan to the dollar the Chinese are basically buying United States Treasurary bonds they are basically bringing liquidiity into the market. If Screatary Snow is successful in getting the Chinese to allow the Yuan/Dollar exchange rate to be determine by market forces then the Chinese would stop buying Treasury Bonds which would reduce liquidity in the market which would then make the available funds to borrow to fall which would cause an increase in interest rates which would make more expensive for people in the United States to borrow for things as such cars and homes.

Upside for unpegging the Yuan

Market forces would most likely cause the Yuan to rise in value against the dollar. It would therefore cause American's to buy less Chinese products and more Chinese to buy more United States products. This would therefore reduce the trading deficit between the Chinese and America. The Bush Administration would think this would beneficial to the United States people and economy.