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Monday, December 19, 2011

Why Are Interest Rates So Low? (Part 4)

The previous 3 posts presented short videos from the Khan Academy that covered some basics of international trade.  They showed a simple example of how a trade imbalance is resolved in a market of freely floating exchange rates.  They showed how currencies and prices adjusted.

Today's 7-minute video presentation, "Pegging the Yuan," takes us closer to the real world.  It begins to look at what happens if China wants to keep the currency at a level where demand for its goods stays high.  How does it do this?  What is the effect on U.S. interest rates?

This is especially interesting today because, as most market observers know, investment professionals expected Treasury yields to rise this year; and they actually fell.  It seems that, while everyone was focused on a Fed that was undertaking unprecedented monetary stimulus, less attention was directed to what the Chinese were doing in the currency markets.

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