Mimicking North Korea, China Tries to Alter Its Own Reality

According to last Saturday's Wall Street Journal, "North Korea is making time for itself - literally." Apparently the country's leadership has decided that clocks will be moved back 30 minutes to reflect "Pyongyang time." Let the laughter from the developed parts of the world begin as this most backwards of nations attempts to redefine time; the sun and planet earth be damned.

But is our smirking countenance truly warranted? Please read on.

As is well known now, China's monetary authorities announced a planned 1.9% reduction in the value of the yuan on Tuesday. Some see the latter as big news, but consider how much the U.S. Treasury has allowed the dollar to slip since 2001, let alone 1931. Since the 1930s, no first world nation can hold a candle to the U.S. when it comes to debauching its currency.  Currency fiddling renders playing with time quite small by comparison.  

So while North Korea lives in an unreality in terms of time (and to be fair, many other things), much of the developed world naively presumes to reshape reality through changes in the measure of value that is money; the negative economic consequences of doing so vastly understated. What's missed by those who should know better is that to alter money with an eye on changing the underlying truth is the comically deluded equivalent of Stephen Curry shrinking the inch so that he can be taller, Tom Brady lengthening the second so that he can be faster, and Paris Hilton expanding the centimeter so that her feet can be smaller. Try as all three might to achieve the equivalent of decreeing that 2+2=10, Curry will always be short by NBA standards, Brady slow, and Hilton somewhat bigfooted.

Money is no different. To quote the late, great Wall Street Journal editorial page editor Robert Bartley, "money is a veil." Changing its value in no way alters reality itself.

The above is important in light of the commentary that has predictably emerged in the aftermath of China's currency decision. Justin Lahart, the endlessly confused "Heard on the Street" columnist at the Journal laughably proclaimed that "The made-in-China price is about to head even lower. So are a lot of other prices - pushing the Federal Reserve's hopes of hitting its inflation target even further out." Where does one begin?

It seems Kim Jong-un has a soulmate in Lahart. Even better, if the former feels he's too short all he need do now is cut the inch in half in order to be 10 feet tall. Lahart will doubtless report the dictator's new height sans irony.

Back to reality, and this is what separates reasonable economic thinkers from the perpetually flustered, is that there are first, second, and third stage results that spring from moves like China's. Most economics reporters only consider the first stage, and that's why they report the equivalent of North Korea's ‘Dear Leader' expanding to over 10-feet tall when attempting to analyze currency movements. A cheaper yuan to them is the same as cheaper Chinese goods.

Not so fast.

Remember, as producers of all manner of saleable goods, China's manufacturers import myriad inputs necessary to produce those marketable goods. But if the yuan is worth less, those inputs must reflect the devalued yuan fairly quickly. Does anyone remember the "oil shocks" that not-so-coincidentally revealed themselves amid Treasury devaluations of the dollar in the early and late ‘70s? Just the same, inputs for Chinese production will necessarily cost more.

Either Chinese companies will have to raise the cost of goods exported to reflect their rising costs of production, or they'll have to accept the "discount" given to their global customer base by the government without their consent. Odds are not all Chinese producers liked the idea of the country's leadership devaluing their earnings through government decree.

What about the employees of these Chinese producers? Presumably their paychecks are denominated in yuan. Will they accept the near 2% reduction in the value of their earnings decreed by their government without attempts to claw back what was taken through nominal pay raises in yuan? While the pundit class sees lower-priced Chinese products due to the devaluation, those able to contemplate second and third stage results of the yuan's decline see something else entirely. Reality is stubborn, and currency devaluation often unearths reality of the painful kind.

Missed by all who presumed to report on the Chinese currency move is that money's sole purpose is as a facilitator of exchange. We're to this day trading products for products (my writing for Safeway's groceries) when we shop, but since there's rarely a coincidence of wants among producers (Safeway has no interest in my writing), money is the accepted measure of value used to render trade easy.

Gold hasn't historically defined money because it's nice to look at, or because a shadowy collection of global bankers conspired to make it money, or to limit the "supply" of money; rather gold has been used to define money for centuries simply because it was the most stable commodity in terms of value that anyone could find. Precisely because it's stable it worked very well as a non-volatile measure that ensured the baker could exchange his bread for the value equivalent amount of the vintner's wine.

Gold-defined money doesn't cause Depressions any more than it fosters booms. All gold does is make money most useful as a medium of exchange. Trade is not war; instead it's the sole purpose of our production. Stable money facilitates trade, and gold has historically brought money the most stability. Money that's soaring in value is just as unfortunate as money that's declining in value when we remember that money's singular purpose is as a stable measure to foster exchange.

Applied to China, the best guess is that with the yuan pegged to the dollar, authorities devalued as a way of reducing yuan volatility wrought by an unstable dollar (see above). Whatever the answer, readers would do best to ignore the analysis of a financial pundit class that, in presuming devaluation equals cheaper Chinese exports, reveals the kind of confusion that we normally only expect from the leaders of the most backward countries on earth.