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[killian]

i work in taiwan. i am paid in new taiwan dollars. the new taiwan dollar seems to be linked/tied to the US dollar. the US dollar has plunged against key financial tools but has pretty much held steady (@34.7 and change) against the NT$.

how will the soft US dollar effect the real earnings here in taiwan? won't taiwan, japan and china be forced to buy even more dollars to try to prop up the value of their huge foreign currency holdings of US dollars? won't all currencies which are tied to the dollar be similarily devalued as the dollar goes soft?

[Okami]

Welcome to a planned economy, Dear Killian. I, Economist Okami, will be your guide.

1. Why has the NT held steady to the US dollar when it has fallen against most other major currencies?

-Unlike other major industrial nations, There is only one place to change your NT to US dollars and vice versa and that is the Chinese Central Bank in Taiwan. They are the de facto rate setters. Foreign exchange reserves, particularly dollars, have grown for the last 16 months straight. Taiwan can keep printing NT to keep the currency cheap against the US dollar. Though this causes some serious economic problems down the road for Taiwan. Taiwan is currently experiencing deflation because of such practices.

2. How will the soft US dollar effect the real earnings here in taiwan?

-It won't as long as the Central Bank of Taiwan keeps it steady, which due to lack of effective economic management by the gov't. will probably stay at the current rate. The likelihood of it get higher(35+NT to 1USD) is relatively slim as Taiwan has a serious trade surplus particularly in USD or USD linked currencies(Chinese Yuan and I would say, Japanese Yen).

3. Won't Taiwan, Japan and China be forced to buy even more dollars to try to prop up the value of their huge foreign currency holdings of US dollars?

-Yes they will(you forgot Korea) and they will be more than happy to do so to the detriment of their societies and citizens. New research and articles coming out point to the dangers of high trade surpluses of export economies. They don't see it in the same light though. Failed often Confucian linked principles and nationalistic ideas keep them from seeing the real damage they do to their own countries.

4. Won't all currencies which are tied to the dollar be similarily devalued as the dollar goes soft?

-Yes they will. Some need this particularly Hong Kong, others particularly China can use this to offset deflation by letting their currencies actually appreciate to the US dollar. This would actually lower the cost of oil for China, because oil is sold in USD and yes I know Europeans are starting to sell oil in Euros, but this is currently only for oil originating in Euro countries, not sure about other instances.

Now let me explain what happens in an export based country running high surpluses. They tend to try to keep the exchange rate heavily in their favor, in contradiction to the rules of economics. They are generally controlled heavily by gov't ministries and beuracracies. This tends to favor an established elite(Japanese Keiritsu(sp?), Korean Chaebol, Chinese CCP family members, and Taiwanese factional political leaders, gangsters and state run corporations).

By keeping the exchange rate artificially high, they flood their countries with money which must be lent out or spent at sometime. This causes overinvestment, where the return on any investment comes closer and closer to 0%, because more and more people have the money to go into the same line of business(i.e. LCD monitors, DRAM chips). This also why you see so many shops with so little business as you walk through the alleys of Taiwan. This overinvestment leads to a flood of goods and credit that eventually must be disposed of leading to nonperforming loans and deflation. The problem is that by this time the policy prescriptions to end these to scourges are in themselves just as bad in the short term as the current problems are in the long term. Nobody likes change or to feel any discomfort so they just muddle along and that's what we are seeing in the following countries except China and nobody can say anything with any certainty about China.

It's a short rundown on the situation. I hope it helps.

CYA
Okami