Page 37 - Ultimate Guide to Currency Trading

More recently there has been the coordination of fiscal and monetary policy in reaction to the
recession that followed the 2008-2009 banking and housing crisis. This most recent recession has
proved to be the deepest and most severe recession since the Great Depression of the 1930s. This
recent recession has been felt worldwide, and its secondary effects are still not known. From the huge
amounts of added money supply to the added debt levels of governments, the outcome is yet to be
finalized. Perhaps it will be a repeat of what was seen before: a combination of the inflation of the
1970s and the recession of the 1980s.

Economically Contrasting China and Switzerland

China has become one of the fastest growing economic zones of the last twenty years. Because of its
growth, it sucks in massive quantities of monetary surplus, which it then turns into investments. These
investments are mainly U.S. government debt. China has become the largest holder of United States T-
bills, T-notes, and T-bonds. These debt instruments act as the currency reserves of the Chinese
government.

Some say that one of the main reasons for China's stellar growth is its artificially low exchange
rate. Since the government of China controls the exchange rate, the government has effectively
created a flow of surplus funds into the country. To understand more easily how this works, consider
the following: A neighbor is an accountant and has a staff of five in his office. He charges the going
rate of $105 per hour for staff and $275 per hour for supervisors. Due to his going rate, he must
compete on other factors besides price. You are also an accountant. You have a staff of five, but you
pay them less and charge only $55 per hour for staff and only $125 per hour for super-visors. With this
scenario you have effectively set your "exchange rate" artificially lower than that of your neighbor,
even though it is the exact same type of work. By the law of economics you will naturally have created
a positive inflow of surplus cash into your business. This holds true when the products are identical
but one supplier's price is considerably lower than the other's. This is the effect that China has created
by keeping its exchange rate low. China has, in effect, lowered the labor rate of the products its
workers produce.

Both China and Switzerland's economies are somewhat similar. One of the main
similarities is that while both China and Switzerland do well at providing the labor

inputs in manufacturing, they are both heavily reliant on imported raw materials to
Essential
make those same goods.

Switzerland, on the other hand, has allowed its currency to float freely against its trading
partners. When there were problems in Europe, the United Kingdom, and the United States, many
found the Swiss franc to be the ultimate safe-haven currency in times of upheaval in the markets. The
Swiss franc was touted as being the paper version of gold. Its price moved to record levels in currency
pairs. This increase has, in turn, caused the Swiss economy problems that are the exact opposite of
China's growth issues.