The Obama administration and others are claiming that the Chinese currency is more fairly valued because it has modestly appreciated.
Alan Tonelson of USBIC shows why this is a myth.
http://americaneconomicalert.org/view_art.asp?Prod_ID=5900
“The upshot would then be that even though the currency has strengthened against the dollar, it is now even more undervalued than it was in 2005. For the Chinese economy’s dramatic progress since the peg was loosened, has driven the Yuan nowadays even further below where it “should be” than it was back then. As a result, a fairly valued Chinese currency today would be much stronger versus the dollar than it has become, and had it been freely traded in recent years, a major rise would have begun much sooner.
It’s clear enough why the Obama administration has embraced the claim that the undervaluation problem is largely solved. This position justifies continued inaction against a production and export subsidy that benefits the U.S. multinational outsourcers that manufacture in China and whose interests are still permitted to dominate American trade policymaking. But the scholars, other so-called experts, and pundits who have swallowed this Kool-Aid - what’s their excuse?”
Excellent point. Moreover, a currency’s “fair value” will vary depending on the circumstances. When a country is running current account deficits, a weaker currency helps to correct the imbalance. When a country is running current account surpluses, a stronger currency is needed to correct the imbalance. Implicitly and sometimes explicitly, Obama and Geithner are settling for a stable current account surplus in China, Japan and Germany and a persistent current account deficit in the USA. All that accomplishes is more foreign debt for the debtor and more excess foreign exchange for the surplus countries. Fair value in times of huge imbalances requires major currency realignment, not stable exchange rates.
Alan Tonelson’s article raises the key question. How do we know when a currency is valued appropriately? The simplest test is that trade is roughly in balance.
As Alan notes, our trade deficit with China is widening steadily. Aside from the recession months July 2008 through Feb 2009, imports from China have risen at 18% per year, compounded rate, going back to about 1990. Exports to China have risen at about 14% per year, compounded.
Whatever happened to the yuan-dollar exchange rate, our trade deficit with China continues to grow at a steady pace.
Exactly. But we must always consider the balance of trade over a cycle, not just a snapshot of the present situation. If all we achieve is balance in trade right now, we are perpetuating the imbalance and the debt that came with it. Long-term balance requires off-setting shorter-term imbalances to correct the legacy of the past.
When the government of China controls the exchange rate, not free market forces, there IS manipulation by any reasonable definition. It really doesn’t matter what the valuation is. It is manipulated. Our government has sold its sovereignty by relying on foreign sources for its funding. We have exchanged jobs so that our politicians can borrow the money from countries like China and not have to raise taxes for the amount they spend.
I am more and more convinced that over half of our Congress should be in federal prison, not in places of power. They are selling our economy out. There is more than one way to slavery than the sword. Financial slavery is just as potent.
I hate to say it, but a default is in order for the countries like China who are playing this game. The biggest problem with this is that this is what wars are made of.
If China can play the currency game, why not the Fed? Just send the Chinese govt. holders of U.S. debt dollars that must be used or inflated away over time. No real exchange except on the terms the Fed gives, just like China does. Then require those dollars to be used to buy goods, not assets, from the U.S.
Fight fire with fire.
Our political leaders, both dem and repub., have spent years taking the path of least resistance instead of doing the job they were paid to do. Our whole economy has paid the price and will continue to do so until we make them change. Political promises are worth about as much as Bush 1′s lips when he said, “Read my lips….”. Judge them on their actions, not their words. I still say federal prison is the best option for many. Does anybody else have a better idea? Perhaps a shipping container full of them back to China?
Hey, Mike, it would be good to have the quotes from the administration (and who it is in the administration) when conveying their policy.
I agree with China Watcher. The measure of good policy that is in the interest of the American economy should be the trade balance, both current and accumulative. If we could get for a container full of politicians what they think they are worth, both of these would be wiped out and we would all be better off. The choice of a) dems or b) repubs. has allowed the oligarchs to capture the wealth of the country by selling out the U.S. economy to the highest bidder. Perhaps we could include them in the shipping container.
Have a Happy Halloween!!!
Tom T.
China has a sovereign right to regulate their commerce and currency as they choose. American fortunes should not hinge on Chinese policy-makers, nor need it. The solution is to have a MADE IN USA TRADE POLICY that compensates for foreign actions by imposing our own trade control measures to compensate. No need to talk war or demand they adopt our policy recommendations, Just make some policy of our own, obviously sorely lacking.
I agree with you, Will. I should have said that the response I got back from the person I was talking to 6 years ago was that “this is how wars are started” when I said that the response to mercantilism is not that difficult- it just takes a little Will power!
Hi Tom T, regarding your feelings towards Congress, I agree they are not advancing the national interest. I wish we could ignite patriotism in the USA (not that there isn’t any), get Americans from all positions in society to agree we will make our fate together as a nation. We will buy American, we will make it in America, we will demand governance that promotes prosperity and opportunity for all. The left would have to swallow that bringing prosperity in the real world means MORE corporate welfare rather than less, and the right would have to swallow MORE democratization of that prosperity, ideally through full employment and strengthened Social Security and National Health. Act like a team, put our differences and animosities aside and agree we need a strong private sector centered around 21st century manufacturing as the engine of wealth creation, but rather than just give the country away to the industrialists they must agree to democratize the prosperity.