The Little Book of the Shrinking Dollar: What You Can Do to Protect Your Money Now

Why Not to Peg?

The nation that tethers its currency to another’s is not free.

To keep your currency in line with the peg, you have to resort to all sorts of currency intervention to preserve the relationship. Just as we saw Japan doing in 2011 (though its relationship to the dollar is not as formal as some).

If you, as a nation, act like Japan, then you get stuck with massive currency reserves to keep your own currency, in this case the yen, from appreciating. That’s a lot of work, and that’s only the beginning of your trouble.

Say the country you’re pegged to has bad monetary policy. You can’t put a stop to it. You don’t have a voice in what they’re doing. In fact, what usually happens is that you follow suit.

Today, Hong Kong is a perfect example of this peril. It is stuck between two monetary regimes, the United States and China. It’s got two masters, and it would rather be free. By maintaining its peg, Hong Kong is stuck “importing” two things: inflation and raging property prices.

Hong Kong can’t say no to the lousy U.S. interest rate policy, no matter what’s going on locally. In this case, the United States slumps and demands near-zero rates like a defibrillator on a dead man, while Hong Kong is booming, bolstered by the growth in mainland China. So property prices are up 70 percent since 2009. Inflation climbs at its fastest pace since 1995.

For Hong Kong, 1995 wasn’t a good year. The same devil—ultra-low interest rates—brought it to the brink. The rates pushed up property ...