Thread: Word problem, US dollar and China Yuan

This is not a formal word problem in the sense that I stumbled upon it in a text book, but rather a discussion between myself and a friends parent.

The context of the word problem is as follows. Currently the US has a very large deficit with most of the debt being owned by China. The parent stated if China were to stop deflating its own currency, and raise it so its worth more, the actual debt we owe in China would shrink.

I have thought about this and tried to work it out but Im not sure if im doing something wrong or if my friends mom is incorrect.

(Im not sure how to set this up correctly, nor the proper questions to ask)

As of 10/17/2009
1 Yuan = .1464 $ (usd)
1 USD = 6.8285 ¥ (yuan)

Lets say China owns $50,000 of total US debt.

I fail to see a scenario where USD debt would shrink from a strengthening yuan.

This seems to be a economic rather than math question. One possible conclusion to this would be that if china were to allow its currency to strengthen then their goods would not be as cheap here in the United States and thus we would purchase less of their goods given the relative rise in price of their goods,(See a Demand Curve). This also requires an answer to the question are you discussing current account debt, i.e. debt arising from trade imbalances, or is it china's holding of our foreign reserves, i.e. they purchase government bonds issued by the US government. This leads to the further question of which currency the debt is to be repaid in. That is the fundamental factor which determines who benefits and who loses from fluctuations in foreign exchange rates. If you clarify the specifics of what you want answered then I believe I could better answer your question.

Originally Posted by allyourbass2212

Currently the USA owes $9 trillion, and the interest on this outstanding loan alone is going to cost 4.5$ trillion over the next decade (projected).

2 questions for you guys
1. With that being said what can the USA do about it?

Its just the same situation as with personal debt; Pay it back if you can, increase the productivity of your economy, stop living beyond your means.

2.Also a coworker today was saying that if China were to stop artifially lowering its currency value, and all other factors remaining equal, the US debt would shrink. Why would our debt shrink if China were to stop deflating its own currency?

http://money.cnn.com/2009/11/19/news/economy/debt_interest/index.htm

Increasing the value of the Yuan is effectively the same as lowering the value of the US dollar, therefore their dollar holdings will be worth less (in Yuan). It would also be inflationary in the US economy (which is another way of saying that the real value of the US Dollar will fall).

CB