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“A currency war the US cannot win”

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Yves here. This post cites a number of recent Western commentaries on China’s currency policies; I suggest, for one stop shopping, you read Martin Wolf comment, “Why America is going to win the global currency battle.”

There are several points in the argument below that are curious, to say the least. One is the notion that the US came out the loser as the result of forcing the yen up through the Plaza accords. If this was so terrible for the US, why is China resisting taking the same moves now? I’d say the contrast between the reasonably prosperous, if unsustainable two decades starting in 1986 in the US, versus the bubble turned to stuck-in-the-mire bust for Japan says any Japanese victory way Pyrrhic. Second is the contention that the US can’t influence the level of the renminbi. Narrowly correct, but irrelevant. If the US forces the dollar down, China will have to keep buying more dollars to suppress the remninbi. Its foreign exchange purchases are now so large that it can’t fully sterilize them, so a bigger level of purchases will generate even more inflation. A fixed currency peg with rising prices means higher export prices and thus worse competitiveness. Third, he argument the US needs China to fund its deficit is also incorrect (see our many posts on modern monetary theory or MMT; the constraint on spending is inflation, which is no where in sight right now, in fact, the Fed is so desperate to create some inflation that it is about to embark on QE).

There are plenty of reasons not to like QE (see our earlier post for a good recap) and we are not fans. But if the reasoning below is widely shared within China, it says China is asserting that the US has downside that the US does not believe it has. So the US is not likely to be deterred, and per above, the US believes it can impose costs on China regardless (worsening its terms of trade).

Now despite the Fed winking and nodding about QE2, the Fed was very slow to act in the crisis, then overreacted, and there isn’t much reason to expect a change in behavior. But the contrast between the Western assessment of the benefits and costs of currency depreciation versus the Chinese stance (at least as presented below) suggests we are indeed on a collision course.

By Yiping Huang, Professor of Economics at the China Center for Economic Research, Peking University. Cross-posted from VoxEU.

The ongoing global imbalance has strengthened calls for the US to declare trade war with China. This column argues that the US did not emerge victorious from the last currency war with Japan, and against China the chances are even slimmer. Instead the upcoming G20 meeting should focus on a broad range of structural adjustments from both sides.

A new currency war is looming. The US Congress has already passed a bill for imposing currency import tariffs, although becoming an actual policy is still a long shot. Tim Geithner is urging the IMF and the international community to play more active roles in promoting more flexible exchange-rate regimes. Martin Wolf, following up the ideas of Gros (2010), prefers capital market restrictions, such as preventing China from purchasing US Treasury bills, as a way of avoiding trade sanctions the fight with ‘stubborn’ China (Wolf 2010). Fred Bergsten proposed countervailing currency intervention for the US to sell dollars to offset China’s intervention in foreign exchange markets (Bergsten 2010). And Paul Krugman has long advised the US government to declare trade war with China (Krugman 2010a, 2010b).

The upcoming G20 Summit in Seoul could potentially become a battlefield of a new currency war. Geithner already indicated earlier his intention of using G20 to pressure China for faster currency appreciation. After all, global rebalancing was one of the policy items identified by G20 leaders from the very beginning. But it remains unclear about the best approach for G20 to deal with the imbalance problem. Economist Bill Cline proposed a new Plaza arrangement several years ago (see Cline 2005). Current discussions indicate that some major deficit countries hope for G20 to move in that direction. Like its predecessor, a Plaza Accord II could demand substantial appreciation of currencies in major surplus economies like China, Japan, Germany, and oil exporting countries.

In order to predict likely forms and outcomes of a new currency war, we need to address the following four questions.

  • Would most G20 members support a Plaza II or a currency war against China, Japan, and other surplus countries?
  • How would the US and its close allies like UK fight this new currency war?
  • Are flexible exchange rates sufficient conditions for resolving the imbalance problems?
  • What would be the best strategy for G20 for the purpose of global rebalancing?

Let’s take these issues one by one.

The Plaza Accord was signed by G5 – major deficit countries of UK and US, major surplus countries of Germany and Japan, and France. A replay, however, is highly unlikely within the G20. While the US may be a strong supporter of some forms of Plaza II, the positions within the European Union may vary, from large deficit countries like UK to large surplus countries like Germany.

Given its previous experiences, Japan will probably be very reluctant to sign Plaza II. And Japan is one of the biggest beneficiaries of economic boom in China. Most importantly, China is not Japan. China will never let the US to force upon it any currency decisions. Other Asian members of G20 like Korea and Indonesia are also running current-account surpluses. So to start with, US and UK probably won’t be able to find enough G20 members to sign a new Plaza arrangement.

But that’s not the end of the story. If a war didn’t break out in the meeting rooms of the G20 Summit, the US still has the option of taking China and other major surplus countries to war alone, or with a couple of its close allies. And there are already enough weapons suggested for the US to use, including import tariffs, countervailing intervention, and capital market restrictions.

The trouble, however, is that all these measures are impractical.

  • Taking import tariffs threatened by the US Congress as an example, even if the US survives the potential WTO rulings, such protectionism measures would mean much more expensive consumer goods and much higher inflation in the US. Is the US prepared to accept these consequences, without necessarily adding jobs?
  • The so-called countervailing intervention probably won’t work, either, at least for China.

Bergsten’s idea is that the US should sell dollars to offset China’s intervention in foreign exchange market. For this to work, the US would have to sell dollars and buy renminbi. But this is impossible given China’s capital-account controls. Where would the US authorities find renminbi?

  • The proposal to prevent China from purchasing the US Treasury bills is somehow ironic. Even if the US is able to ban China in the primary market of the Treasury bills, it has no effective way of stopping China from accessing to the secondary markets.

More importantly, China and Japan each accounts for more than 20% of the Treasury market. Does the US really have stomach for this given its gigantic fiscal problems?

A fundamental issue we need to understand is the importance of exchange-rate regimes for external imbalances. Does currency matter? Of course, it does. Exchange rate is price of one currency relative to another. An undervalued currency promotes exports, inhibits imports and, therefore, improves trade balance. Thus a more flexible exchange rate should be preferred, especially for major imbalance economies.

But does the exchange rate hold all the keys to the imbalance problem? The answer is, definitely, no.

Lessons from Plaza I
Experts who are interested in Plaza II should first study carefully the experiences of the original Plaza Accord. The yen/dollar rate dropped from 250 in early 1985 to 150 in early 1988 and further to about 80 in mid-1995. But Japan’s current-account surpluses did not disappear.

Likewise, the real effective exchange rate of the US dollar fluctuated during the past three decades, but the US current-account deficits continued to climb, especially during the ten years preceding the global crisis. If the Plaza Accord did not achieve its original goal, why all of a sudden people became interested in this old idea again?

The US politics of beating the war drums
The truth is that it is driven more by political considerations than economic factors. American politicians should know that the US loss of manufacturing jobs over the past decades was caused mainly by changing comparative advantage. And the current high unemployment rate is a symptom of recession. Forcing China to revalue its currency, however, yields political benefits for these politicians – even if it does not yield economic benefits for America as a whole.

Sadly, if there were a Plaza II, it would not be based on rational economic calculation. The danger of politically driven process is that it is easy to over-kill. That could be extremely damaging for both the Chinese and American economies. Perhaps this was what Wen Jiabao worried about when he spoke of export and job implications of the exchange rate.

A better way forward
The G20 does have an important role to play in global rebalancing. But it is far better for focus on a comprehensive package centred on structural reforms in both surplus and deficit countries. Exchange rates should be an important part of that package. For instance, in order to reduce the current account deficits, the US has to raise its saving ratio. But simply devaluing the dollar would not be sufficient for that purpose.

Likewise, the current-account surpluses in China were caused by a broad set of distortions, especially in the factor markets. For instance, the currency may be undervalued, but the interest rates are probably also repressed. All these distortions in costs of labour, capital, land and resources artificially improve competitiveness of Chinese products in the international markets (Huang 2010). Therefore, correction of China’s external imbalances also requires elimination of all these distortions. If all these needed adjustments are concentrated on the currency alone, we could easily get over-sized exchange-rate adjustment and major adjustment difficulties for the real economy.

The good news is that rebalancing is already occurring. The US current-account deficits and Chinese surpluses, as shares of their respective GDPs, have both at least halved from their respective pre-crisis peaks. There might be some cyclical reasons for such correction, but the bulk of reductions of the imbalances were structural improvement and thus sustainable (Freund 2010). It’s surprising that none of the American politicians take notice of such improvement. It is perhaps even more disappointing that these important changes slipped the eyes of fame-chasing, not truth-seeking, commentators like Messrs. Bergsten, Wolf, and Krugman. Rebalancing needs to continue, but we have travelled some distance already.

In China, structural improvement also took place, mainly because of changes in factor markets. Factor costs are already rising across board, from wages to electricity tariffs. These have led to effective appreciation of renminbi, even though the nominal exchange rates were relatively stable (Xiaolian 2010). China’s official CPI is currently running at 3%-3.5% year-on-year. But most economists share a consensus view that the official rate is substantially underestimated. The month-on-month annualised rate, however, is already way above 7%. If we take this as the annual rate, then renminbi actually appreciates by more than 5% in real terms against currencies of most advanced economies.

These are the types of changes that the international community should encourage and the G20 agenda should focus on. A currency war could only lead to lose-lose situation. The US did not win the past currency war with Japan. It is less likely to win a new war with China.

References
Bergsten, Fred (2010), “We can fight fire with fire on the renminbi”, Financial Times, 3 October.

Cline, William R (2005), “The case for a new Plaza arrangement”, Policy Briefs in International Economics, Number PB05-4, Institute of International Economics, December.

Freund, Caroline (2010), “Adjustment in global imbalances and the future of trade growth”, in Stijn Claessens, Simon Evenett and Bernard Hoekman (eds.), Rebalancing the Global Economy: A Primer for Policymaking, A VoxEU.org Publication, 23 June.

Gros, Daniel (2010), “How to avoid a trade war: A reciprocity requirement”, VoxEU.org, 8 October.

Huang, Yiping (2010), “What caused China’s current account surplus?”, in Simon Evenett (ed.), The US-Sino Currency Dispute: New Insights from Economics, Politics and Law, A VoxEU.org Publication, 15 April.

Krugman, Paul (2010a), “Chinese New Year”, nytimes.com, 1 January.

Krugman, Paul (2010b), “China’s Swan Song”, The New York Times, 11 March.

Wolf, Martin (2010), “How to fight the currency wars with stubborn China?”, Financial Times, 5 October.

Xiaolian, Hu (2010), “Coordinated relationship between factor price adjustments and exchange rate policy reform”, People’s Bank of China website, July.

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33 comments

  1. Daniel de Paris

    Regards for this great link-up and assorted comments.

    You said that The contrast between the Western assessment of the benefits and costs of currency depreciation versus the Chinese stance (at least as presented below) suggests we are indeed on a collision course.

    For sure the collision course is getting more obvious by the day. But may I say I disagree on the sort of “Western assessment”. IMHO there is such thing as “the Chinese assessment” since capital/currency is/are currently under Beijing control. In view of the Japanese behaviour, I’d contend that this ain’t so much different.

    Concerning our OECD countries, I just do not buy the view that there is a “Western assessment”. Some sort of common governmental view across OECD certainly so.

    An across-the-board support for currency destruction by open Western capital and currency markets, I do not buy this.

    And that’s “why America is NOT going to win the global currency battle”. But that’s about time for net savers (those stupid over 50/60 years of age with no massive investors (sic) with heavy long-run mortgage positions) to start grasping it.

    Capital controls are a distinct possibility. Clearer and clearer every day…

  2. renting heavenly

    ‘A fixed currency peg with rising prices means higher export prices and thus worse competitiveness.’

    Well, maybe short term. Germany, which faced an generally appreciating euro against the dollar for years after the euro was introduced, was able to increase its competitiveness by becoming a leaner and meaner manufacturer.

    It is possible, of course, that the Chinese are not in a position to do what both Germany and Japan were able to do in the past – become even better at exports in the facing of a currency disadvantage.

    Much the same can be seen in terms of oil (and energy prices in general) prices in the 1970s – a number of countries (again, Germany and Japan being perfect examples) were able to increase efficiency to the point that higher energy costs were no longer such a massive burden.

    Some countries seem able to rise to challenges – others just fudge the paperwork. Where China ends up is open, of course.

  3. Charley

    China does not operate WalMarts in the United States, but WalMart operates factories in China. So what will China revaluation fix?

    1. Charley

      I would add: If China were to completely dollarize its economy, the wage differential would still exist and capital would continue to flow from the US to China. Everything else being equal, capital will always seek out the least productive economy, since this creates the possibility for the greatest profits.

      So, what is being asked here is that China should annul the laws of capital — which always seeks to drive wages down — by taking steps that drives wages up in China. If this is to be, why should the US not lead this effort and drive the wages of its population up first?

      The answer is simple: That would cut into the profits of US capitals, and on no account will this be allowed to happen. Thus the struggle here is not over exchange rates, but, rather, which capitals must make room for the others — will Chinese capital make room for the older American capital, or will American capital make room for the new upstart.

  4. bill wilson

    I don’t have time to go into how far off base Mr. Huang is, but a sample:

    “such protectionism measures would mean much more expensive consumer goods and much higher inflation in the US. Is the US prepared to accept these consequences, without necessarily adding jobs? ” … the last time I looked the Fed wanted inflation … so YES.

    “Bergsten’s idea is that the US should sell dollars to offset China’s intervention in foreign exchange market. For this to work, the US would have to sell dollars and buy renminbi. But this is impossible given China’s capital-account controls. Where would the US authorities find renminbi?” … I guess that is the crux of the issue. Label China a currency manipulator then require US companies buying goods from China to pay for those goods with renminbi (no $$$). No tariffs required, just an internationally convertible currency – something the world’s second biggest economy should be using.

    1. Charley

      And, where will WalMart move its factories next? Africa seems to be attracting a lot of attention these days…

      You don’t have a dog in this fight.

  5. frances snoot

    UNCTAD has been forwarding a multilateral exchange rate system for over a year now:

    http://www.unctad.org/Templates/Page.asp?intItemID=4051&lang=1

    The system would, must needs, operate according to a multilateral governance structure induced by autonomous decision relevant to a global central ‘head’.

    Domestically traded currency would not circulate cross-border internationally as trade vehicle in the new system.

  6. i on the ball patriot

    This “war” is in reality the slow it all down ‘Perpetual Conflict Accord’. The wealthy ruling elite’s Plaza Accord revised but in secret …

    Your governments really don’t give a shit about workers and their jobs, they care more about those who pull their strings and cut their pay checks, the central bank controllers, and they want reduced global consumption and a die off in the masses so as to throttle the planet back to sustainability from the unsustainable position that THEY put it in.

    The Profit Driven Vanilla Greed days are over, June Cleaver is dead, and we can’t really ALL have a big ass gas guzzling four door sedan like the Cleavers owned anyway. Control Driven Pernicious Greed, aided and abetted by Mr. Global Propaganda, is now clearly running the new decimation show of the wealthy global ruling elite.

    So we get central bank contrived and controlled fights in the currency trading pits while the masses are intentionally thrust into perpetual conflict with each other, starve, and have austerity imposed on them.

    If it doesn’t happen fast enough for the elite they will ratchet up the wars.

    The global masses are stuck in little non responsive to the will of the people nation state boxes operated by hijacked governments while the wealthy global elite operate freely.

    No bankers will starve.

    Deception is the strongest political force on the planet.

  7. frances snoot

    What’s happening with the sdr reweight this December? Will yuan be included this year? Is the reweight another way of saying ‘Plaza Accord’?

  8. Mr. E

    I don’t think this article makes much sense. I am not even certain what the primary support of the claim is for the article.

    For example, the exchange rate policy isn’t the only problem, but it is huge, and we can do something about it.

    This is wrong headed:

    “Bergsten’s idea is that the US should sell dollars to offset China’s intervention in foreign exchange market. For this to work, the US would have to sell dollars and buy renminbi. But this is impossible given China’s capital-account controls. Where would the US authorities find renminbi?”

    We do not need to purchase renminbi directly from China. We can simply supply more cash dollars, which would force the value of the dollar down. This would result in unbalancing the Chinese economy even more than it already is, and perhaps push it over the edge.

    Yves pointed out in several posts her first hand experience with how the Japanese and other Asian countries kept U.S. goods out of their market through a web of informal tarriffs. So the point about the Plaza accords not changing the Current accounts is meaningless to the fed and should be.

    The Feds mandate is to provide full employment in the U.S. If that results in imbalances in the rest of the world due to crazy currency policy, that isn’t our problem nor should it be.

    The Triffin Delimma is a delimma for economists, not countries. The reserve bank of a country has a responsibility to the citizens of the country first and foremost, not as a secondary concern after taking care of foreign reserve currency holders.

    The Fed does not have a responsibility to make sure China is the cheapest provider of goods, we have a dual mandate of low inflation and full employment for U.S. citizens. If China wants to try to import all the inflation, that is their concern and problem.

    And we know from MMT that once the money is spent, federal reserve actions have little effect on the inflation rate. We have empirical proof of this idea for decades in a variety of countries. So what if China decides to dump every treasury they own? Have the Fed buy every one. Fed actions are about price, not quantity of money.

    1. Rodger Mitchell

      Mr. E

      You said, “So what if China decides to dump every treasury they own? Have the Fed buy every one. Fed actions are about price, not quantity of money.”

      You are absolutely correct, of course, but it’s even simpler than that. If China sells all its T-securities, the Federal Reserve Bank merely would move dollars from the buyer’s checking account to China’s checking account — both at the Federal Reserve Bank — while debiting China’s T-security account and crediting the buyer’s T-security account — also at the Fed.

      The entire transaction would require one millisecond, and have no effect on the quantity of dollars or T-securities, or anything else of importance. It’s an issue only for those who do not understand monetary sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/).

      Sadly, President Obama may be one of those.

      Rodger Malcolm Mitchell

  9. frances snoot

    Fixed Euro/Dollar exchange rate?

    “Shaking his head, Mr. Mundell asserts: “The issue should not be treated as a bilateral dispute between the U.S. and China. It’s a multilateral issue because the U.S. deficit itself is a multilateral issue that is connected with the international role of the dollar.”

    He goes on to explain that the dollar bloc includes China and other Asian countries—except Japan—but that the euro now constitutes the rest of the world. “The euro today is the counter-dollar,” he says. “The most important initiative you could take to improve the world economy would be to stabilize the dollar-euro rate.”

    He thinks the European Central Bank, along with the Federal Reserve, should intervene in currency markets to limit movement in the world’s single most important exchange rate, pointing out that the dollar and euro together represent 40% of the world economy.”

    http://online.wsj.com/article/SB10001424052748704361504575552481963474898.html

    http://www.businessweek.com/news/2010-10-19/u-a-e-central-bank-appoints-mundell-yam-to-advisory-council.html

  10. floyd

    “There are several points in the argument below that are curious, to say the least. One is the notion that the US came out the loser as the result of forcing the yen up through the Plaza accords. If this was so terrible for the US, why is China resisting taking the same moves now? I’d say the contrast between the reasonably prosperous, if unsustainable two decades starting in 1986 in the US, versus the bubble turned to stuck-in-the-mire bust for Japan says any Japanese victory way Pyrrhic. ”

    ===I smell gunpowder between those lines, this paragraph convey a notion of hostality, since the author implied that china should support anyting terrible for US. And sometimes country and another country will not necessarily have mutual exclusive interests. Back in Plaza Accord case, sure Japan didn’t win, but did US achieve the goal of eliminate current accout deficit? Did you really scored?===

    Second is the contention that the US can’t influence the level of the renminbi. Narrowly correct, but irrelevant. If the US forces the dollar down, China will have to keep buying more dollars to suppress the remninbi. Its foreign exchange purchases are now so large that it can’t fully sterilize them, so a bigger level of purchases will generate even more inflation. A fixed currency peg with rising prices means higher export prices and thus worse competitiveness.

    ===This is true, but a US foreced depreciation of USD is essentially currency war toward the whole world outside US…BTW, I am not doubting your courage===

    Third, he argument the US needs China to fund its deficit is also incorrect

    ===Also true, if US want inflation desperately enough to take the risk of hyperinflation, that’s normal when you finance your government by money printed in central bank. I believe that’s a Pandora’s Box, you? ===

    1. alex

      “This is true, but a US forced depreciation of USD is essentially currency war toward the whole world outside US”

      The continued suppression of the value of the RMB is essentially currency war toward the whole world outside China, because of the exorbitant Chinese trade surplus. By contrast a “forced depreciation” of the USD (actually just counteracting the long term forced appreciation) is not, because of the continuing US trade deficit. Exchange rates are at the right value when trade balances. QED

      Now I realize that the status of the USD as the world’s reserve currency complicates this issue. As an American I’m all in favor of moving away from the USD as the world’s reserve currency because the supposed exorbitant privilege has actually become a golden noose. It’s best for all parties if this can be done in an orderly, coordinated and negotiated fashion. However, if due to the intransigence of various other countries it can’t be, I say screw ‘em. We print the dollars and we should print however many benefit the US.

      1. floyd

        The trade between China and it’s biggest counterparties, a.k.a, US and Europe is not balanced. China supply lower level manufacture product like toys and hair drier. And what western countries could sell in exchange are luxury goods and high tech product, since western countries generally do not want sell China the later, the inbalance occurs. Before this inbalance come to an end, it’s hard to determin current account issues like how much should RMB depreciate.

        Regarding currency warfare, it’s important to be sure problem can be solved by warfare before rushing into battle field. Appreciation for current deficit, that didn’t work on Japan. Will it work on China? I doubt if the elasticity supports that.

  11. Mandos

    The truth is that it is driven more by political considerations than economic factors. American politicians should know that the US loss of manufacturing jobs over the past decades was caused mainly by changing comparative advantage.

    Whenever I hear the words “changing comparative advantage”, my hand reaches to check on my wallet. What is this supposed to mean in this context? Isn’t the Chinese currency control a part of this advantage, making Chinese labour artificially cheaper with respect to American labour then it would otherwise be (already cheap)?

    1. alex

      What makes comparative advantage drivel as an explanation is that the concept of comparative advantage is only useful and meaningful in a balanced trade scenario. That’s been understood by everyone from Ricardo on. Talking about comparative advantage as a source of a trade imbalance is complete blather.

  12. PJM

    Welcome to the new world: the world were USA cant win all the battles. Including economics wars.

    Before the crash I just want to say this: some strange news came to headlines in my cowntry. China wants to buy portuguese sovereign bonds and Portugals support in Europe and International Foruns.

    Hey thisi is only bizarre. China wants to buy Portugal, an old USA ally.

    Bye, bye USA.

    Kind Regards

  13. john bougearel

    “the constraint on spending is inflation, which is no where in sight right now, in fact, the Fed is so desperate to create some inflation that it is about to embark on QE).”

    fed President William Dudley is arguing desparately for QE not so much so to create some inflation but to try to do something about the high level of structural unemployment that is reminscent of the structural high levels of unemployment in the Great Depression.

    When the govt devalued the dollar by 40% in 1933s it did not create one stinking job, the structurally high unemployment stayed high until WWII came along. So, Dudley is falsely (disingenously) using the high structural level of unemployment to justify QE2, which will only serve to create asset bubbles in commodities, foreign currencies, and equities. The Fed is trying to target asset inflation, but the non-conventional measures they are using with QE are so blunt, the target is dispersed amongst all asset classes, including commodities which means higher food and energy costs for Americans. This means this non-conventional policy to inflate assets will further hurt everyday Americans that are already being penalized with low rates of return on their short term fixed income investments.

    The Fed’s easy monetary policies are becoming more antagonistic and toxic everyday for everyday Americans.

  14. Joseppi

    The currency Wars is like a game of cards, where every player can make his own cards, while trying to bluff the other players into betting that the game is legit.

    It’s not the changing value of the currencies that should be the focus, it’s who has the means of production to create real capital, and which countries are stuck in a cycle of depending on more debt to service past non-productive debt.

    You guessed which countries I’m talking about. Germany, China, Brazil and others are producing and creating capital. While Japan, US and UK are trapped in a downward spirial of debt because of ZIRP and allowing insolvent banks to exist through fraud.

    Currencies can change color, shape, value, but it’s the economies they represent that gives them value. This will become painfully apparent as currencies are deconstructed through the debasement of QE.

    1. Joseppi

      Central Banks, I think, but they have to now compete with the FOREX market players.
      As we can now see from the recent Bank of Japan intervention Central Banks are becoming superfluous (is that the word I want to use?) to the value of a currency.

      1. frances snoot

        Seems the IMF might have a bit of influence? Who puts those figures down for Thomson Reuters? Hope the chap doesn’t have a fat finger.

  15. emca

    With a statement like:

    “…important changes slipped the eyes of fame-chasing, not truth-seeking, commentators like Messrs. Bergsten, Wolf, and Krugman”

    its hard to see this as anything else but a propaganda piece in the tradition of “U.S. – baby kissing politicians” and other sneers occasioned from voices within this country.

    If you want to view another, less rhetorical perspective from VOX, you might want to read Professor’s Susan Ariel Aaronson observations on the WTO in relation to internal policies within China:

    http://www.voxeu.org/index.php?q=node/5587

    Ms. Aaronson short piece reflects on a country with a simultaneous authoritarian-unregulated economic/political infrastructure and what that reality means on the international front, visa the WTO and impact to that organization’s function. Her conclusion is that this contradiction is not just China’s problem, but the WTO’s also; that is order for the WTO to remain an effective orgaization, China’s internal convulsions in this sphere will need to be addressed.

    Somewhat in line with above, I just caught a news item of China raising its interest rate, purportedly to offset encroaching inflation do to government inspired speculation bubbles and catching most players in the U.S. (if not elsewhere) off-guard.

    Particularly odd, since not long ago, China (BOC?) had indicated this would not happen.

  16. Allen C

    The real issue is currency recycling. The massive distortions today are the result of decades of currency recycling. Look at the charts of current accounts and trade over the last 30 years. At this point, the US absolutely requires a negative trade balance in order to sustain current living standards.

    The reality is that multi-decade currency recycling has led to a loss in manufacturing capability that requires many years to rebuild. Much of the manufacturing support infrastructure is gone.

    The ultimate solution is to ban currency recycling.

    1. Joseppi

      On the road to the ultimate solution, which I think is unobtainable because of sovereign self-interest, we must remember that to rebuild a manufacturing infrastructure there needs to be capital – Piling debt securities on debt securities will not rebuild America’s manufacturing capabilities.

  17. Rodger Mitchell

    More to the point, the U.S. should not want to “win” the currency war, if winning means increasing the value of the yuan relative to the dollar. In fact, that is the least intelligent thing we can do.

    For those of you who still fear federal deficits, you should be aware that federal deficit spending and exporting essentially are identical.

    In the first case, the federal government buys, and pays with dollars, for goods and services. It is the customer. In the second case, foreigners buy, and pay with dollars, for goods and services. Foreigners are the customers. In both cases, dollars are added to the U.S.economy.

    Admittedly, there is are differences, and these differences are explained at http://rodgermmitchell.wordpress.com/2010/10/15/do-you-know-what-you-want-deficits-vs-exports-vs-stronger-dollar-vs-inflation/.

    The link explains why the following may be optimal:

    1. Increased federal deficits, for world economic growth
    2. Reduced exports (negative balance of trade), to supply the world with dollars.
    3. Stronger dollar, for more imports, providing us with better goods and services at lower prices
    4. Modest inflation, to stimulate present demand for goods and services.

    Rodger Malcolm Mitchell

  18. Nathanael

    “the US loss of manufacturing jobs over the past decades was caused mainly by”

    lax environmental standards and labor standards in China (and elsewhere), and US failure to impose conditional tariffs which would have “internalized the externalities”.

    Any economist who fails to mention that causes me to tune out because he’s obviously very ignorant of basic economics.

  19. Vincent Cate

    “If the US forces the dollar down, China will have to keep buying more dollars to suppress the remninbi.”

    Wrong. China could print remninbi and buy anything to suppress the reminbi. They could buy resource companies in Africa and Australia. They could buy gold and silver. Just takes printing and spending to lower the value of a currency. And in fact over the last 12 months China has reduced their holdings of treasuries by $100 billion. So they are in now way required to buy dollars, just not true.

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