Question

Please Summarize this article for me.

It's called the "Impossible Trinity" for a reason.

In economics, you can't have it all. A country must choose two out of the following:

control of a fixed and stable exchange rate

independent monetary policy

free and open international capital flows

The theory is that a country that attempts to get all three at once will be broken by the international markets as they force a run on the currency.

If an independent central bank imposes low interest rates to stimulate the economy, capital will flow out in a search of a decent return or yield, and the currency will devalue. Officials will eventually have to release their currency pegs and devalue or impose strict controls to stop capital fleeing the country.

It's a problem that China is wrestling with at the moment and something that no country has ever managed to get right. Most developed economies are happy with two - picking an independent central bank and free flows of capital and leaving the exchange rate to market.

The UK went for the triple in the early 90s. This ended in disaster. Interest rates shot up to 15% in an attempt to support the pound against the weight of the international markets, and keep it in the European exchange rate mechanism, causing a housing collapse and a recession in the process.

With China's attempt, policymakers are finding themselves trying to juggle some delicate trade-offs.

Interest rates are low to keep the money supply up and liquidity in the economy buoyant. The currency, allowed to float a bit more freely than it has in the past is weakening, and capital outflows are accelerating.

Here's Societe Generale's Jason Daw and Wei Yao:

Total net capital outflows, including net errors and omissions (E&O), occurred for the sixth straight quarter and reached a new record of $221bn. The decline in official reserves, adjusted for FX valuations, was also a record at $161bn.

It's a dangerous gamble but one that is worth pursuing.

If China succeeds, at least for a while, it can buy itself time to rebalance its domestic economy from slowing manufacturing to growing services and domestic consumption. And claim to be the first country to solve a trilemma that has haunted economics for decades.

If it doesn't work, policymakers will be on the hook for burning through hundreds of billions with nothing to show for it.

Answer 1

Impossible Trinity The impossible trinity is a concept in intemational it is impossible to have a fixed foreign exchange rate,free capital movement, an independent monetary policy the same time and if a country attempts to get all three at once will not be able to sustain international markets as they force a run on the currency. economics according to whiclh Low interest rates results in capital outflow and the devaluation of currency and thus currency pegs will have to be released and measures to control capital outflow will need to be implemented. China is a classic example of such a case.UK also tried to hang on all the three but it failed. Today most of the developed economies have chosen two out of three yk an independent monetary policy and free flows of capital and leaving the exchange rate to market. With China's attempt, certain tradeoffs are tried by the policymakers such as low interest rates coupled with currency outflow and a little room for the currency to float-which it considers a dangerous gamble which when succeeded will help it to revive its economy and if not then it may lose hundreds of billions From above arguments we can thus conclude that the ruling of impossible trinity prevails at all time and for the smooth functioning of the economy a country will have to choose the combination of any two and not the three simultaneously