Thursday, October 19, 2006

Lost in Translation or Who is this Lunatic?!?!?

I was at a Huntsman customer conference this past week and had the misfortune of listening to the idiotic ramblings of Professor Larry Lang. Or rather, I was listening to the horrible translation of Professor Larry Lang. While most of the audience understood Mandarin, the conference attracted attendees from all over Asia and many did not. The fine folks at Huntsman provided headsets connected wirelessly to translators sitting in the back of the room. Anyhow, either the translators were REALLY bad or Larry Lang is a raving lunatic who's alleged PhD in Finance from Wharton should be revoked. At a minimum, he should be put on a long sabbatical from his professorship at Chinese University in Hong Kong lest some student actually listen to his lunacy and believe him. From what I was able to gather, "Professor" Lang was actually advocating a fixed exchange rate between the Chinese Yuan and the U.S. Dollar! His rational for this was that the Chinese government wasn't savvy enough to have a floating currency and that George Soros would come in and break the Chinese currency. He also had some strange conspiracy theories about the U.S. wanting to somehow cheat the Chinese by manipulating exchange rates. I forget his exact words but it was something like, "Look what happened to the Japanese! They bought Rockerfeller Center and the Americans got all mad and made them float their currency and a few weeks later Japan had to sell it back for a huge loss!" I was speachless.

Someone from the audience asked him about the long term risks of a pegged currency. He replied, "Good question but if you want to talk about risks, think about what a floating exchange rate would mean. Today the RMB is up 5%, tomorrow it's down 2%, the next day it's back up 3%. That's risk! Next question."

I don't really understand Macro Economics as well as say Bayesian Statistics and Markov Chains (which just sound fancy but are quite simple). However, I know enough Macro to know that fixed exchange rates are next to impossible to do successfully. Pegging a currency is like keeping up with the Joneses. Unless you have the exact same financial situation and utility functions (akin to going to full dollarization as Panama has), it's better to let your currency float. Then again, I actually believe in nonsense such as market efficiency and free markets.

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