But why does China continuously refuse the inevitable yuan value reform?

It’s true – China wants its currency to become a major force in world trade and finance. China can only achieve this by letting their currency’s value to be representative of market forces. China also fears that allowing the yuan to appreciate will only undermine the country’s competitiveness when it comes to its job-creating export sector and force domestic reforms that could destabilize their economy.

Of course, there is a deeper reason: in China, fattening people’s pockets has become the primary –and even arguably, the only – way the Chinese regime maintains its legitimacy. Despite the fact that China is now the second largest economy next to U.S., the country still holds the record for having the largest population in the world. In fact, according to the World Bank, roughly 200 million Chinese lives on less than $1.25/day.

In the end, you can’t blame China. When your country’s grassroots’ statistics tell your government you’re still poor, you tend to think more of protecting your own economy, regardless of how intense the global community badgers you.

Source: Time

So what are the major factors that influence exchange rates?

Differentials in Inflation. A country with a consistently lower inflation rate generally exhibits a rising currency value. This means that a country’s purchasing power increases relative to other currencies. (Take note that exchange rates are relative and are expressed in comparison to the currencies of other countries.)

Differentials in Interest Rates. Interest rates, inflation, and exchange rates are closely linked together. When central banks manipulate interest rates, both inflation and exchange rates are also influenced. Higher interest rates allow lenders to gain higher returns. Notably, higher interest rates also attract foreign capital that causes exchange rates to rise.

Current-Account Deficits. The ‘current account’ reflects all trade payments between countries for goods, services, interest, and dividends. So, a deficit in the current account means that a country is spending more on foreign trade than what it’s earning. In other words, the excess demand for foreign currency pulls down a country’s exchange rate until domestic goods and services are cheap enough for foreigners and foreign assets are too expensive to generate domestic returns. The difference between a country’s imports and exports is unhealthy; the balance of trade is disrupted.

Public Debt. There are instances when a country needs to borrow money to pay for public sector projects and, also, for their own government’s funding. While such move stimulates the domestic economy, a large debt encourages inflation. This leads back to the discussion on the differentials in inflation. High inflation = low currency = low purchasing power.

Terms of Trade. ‘Terms of trade’ refers to the ratio comparing export and import prices. An increasing terms of trade means a greater demand for the countries exports. This translates to high revenues from exports and an increased demand for the country’s currency.

Political Stability and Economic Performance. A stable country is more likely to exhibit a strong economic performance. Stable countries are also the same countries that attract foreign investments. So as more investments come in, a country’s capital rises. In effect, this ensures a more stable currency.

Why bother to know these things? Because exchange rates matter on a smaller scale as well, i.e. they impact the real return on an investor’s portfolio; because exchange rates also affect you’re spending, as well the prices of your country’s goods and services, and even employment rates.

Source: Investopedia

Falling income and reduced buying power means that the family needs to cope with the rising expenses. It might be selling the house or the car but adjustments need to be made.

Savings and assets are now devalued. With the market flat, stocks and other such investments aren’t really offering any real value for the long term.

Raising a child is a millionaire’s job. From the moment of conception to the kid’s college graduation, a child is probably a person’s biggest expense in a lifetime.

With education costs sky-high and rising, families are now deliberating whether the can actually send their kid to college. And even at that, a college degree isn’t exactly a clear guarantee of future success in the job market.

And in the near future when health care becomes an issue thanks to the natural process of ageing, middle class Americans would need a fortune to cope with these expenses.

Thanks to the recession, many middle class Americans are now suffering from unemployment and reduced income. While this definitely affects the short term, long term effects can even spill over to their children’s lives.

Opportunities created by parents’ income do are largely contributory to kids’ future success. Given parents’ financial situations today, they are not likely able to help out their kids.

The money needed for college becomes hard to raise. Loans need to be taken and that even makes prospects worse for kids since these leaves them with thousands of dollar in debt even before earning their first pay check.

According to WSJ, those with college degrees generally fare better than their high school grad counterparts. Unemployment is lower and incomes are definitely higher for college graduates.

In addition, when parents used to help out kids pursue the American dream by giving them funding for start up capitals and such, parents of today won’t just have the luxury to help kids out.

CNN offers us a few things that could go wrong in 2010.

For starters, analysts think that while the latter half of 2009 offered a very positive ending to an otherwise tragic year for stocks, 2010 might not offer that much of gains for investors.

The economic growth’s sustainability is still questionable. Joblessness is still abound. The housing market is still weak. The dollar is struggling.

These indicators lead some experts to think that the economy might dip into another recession again after a short period of growth.

While there’s no reason to go about 2010 thinking that it’ll be a down year, those expecting that 2010 will be the great year of a spectacular recovery might be disappointed. Caution is always key.