Exporting Inflation

Folks,

Below is a cut and paste from part of an article of which I lost the original source, but little
matter... it is a good explanation of how USA can "export inflation" or expressed otherwise,
from Hong Kong's point of view, "import inflation."

Hong Kong is China, so this is a fascinating "alternative case" playing out simultaneously.

What the bad guys among our politicians want China to do, that is for the Chinese to revalue
the currency to harm their economy and help some in USA, Hong Kong does quite regularly.

Hong Kong is finding this more and more difficult to do, so Hong Kong may have to follow
the Chinese method of managing US dollar flows through hong kong in a different manner.

In any case, when the bad policy people tell you all will be wonderful if the Chinese revalue
the Yuan, we can see if they are right (and how they are wrong) by watching Hong Kong.

John


With the $ waning fast and currency pressures across the globe, never has there been a time
when
investors have needed safe-havens for their wealth. At the front of these sits gold and later
silver.
Many feel that the pressure may be short-term, but we believe it is systemic and growing
worse by
the day. As the hemorrhaging of U.S. $ across the world continues, smaller Central Banks
are
fighting to stop their currencies from rising so as to protect the competitiveness of their own
currencies. If the pressure persists these banks will be forced to take more regulatory
measures
such as imposing controls on inflows. The latest reported incident of these is in Hog Kong.



Hong Kong's de-facto central bank stepped in four times last week to defend the Hong Kong
dollar's peg to the U.S. dollar, injecting about $800 million worth of local currency into the
red-
hot market. The Hong Kong Monetary Authority injected a total 6.2 billion Hong Kong dollars
($800 million) into the market. As the U.S. $ weakens so this intervention will continue.
Under
Hong Kong's currency board system, the Hong Kong $ is pegged at 7.80 to the U.S. $ but is
allowed to trade between 7.75 and 7.85. When the Hong Kong dollar reaches the limits of its
trading band, the monetary authority can be expected to intervene. With the cut in U.S.
interest
rates this week more upward pressure will come onto the HK$. By intervening, Honk Kong
releases
more local currency, so importing inflation and allowing more ‘hot’ money into their system.
Such
investments can leave as quickly as they arrive contracting money supply when they leave,
bringing instability and eventual loss of control over the money supply should such actions
reach
extremes. Inflow Capital Controls are another way of coping with this problem or a strong
revaluation of the currency and a departure from the $ peg.

The Hong Kong $ has been rising against the U.S. $ as investors pour money into the soaring
Hong Kong stock market. The Hong Kong $ hovered near 7.75 to the U.S. $ all morning last
Wednesday before the Hong Kong Monetary Authority began buying greenbacks to keep the
local
currency within the trading range. This week’s moves follow two interventions by the HKMA
last
week, which were its first such actions in more than two years, causing speculation that
Hong
Kong might widen the peg, or drop it all together. The Hong Kong government is "totally
committed" to the linked exchange rate mechanism. This is usually a prelude to actions to
fully
control the situation along the line we mention here.

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