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Here’s my latest column in The Freeman. In it, I assume (for the sake of argument) that the Beijing government does in fact keep the Chinese yuan undervalued. I then ask if such a policy harms Americans and helps the Chinese people.
I answer “no”:
The real costs of the resources and outputs exported by the Chinese people are not lowered simply because Beijing keeps the price of the yuan artificially low. And the resources spent to supply the extra American demand that results from an artificially low price of yuan"”even though they are unseen by the untrained eye"”represent a huge cost that harms the Chinese economy.
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Mathieu Bédard "In it, I assume (for the sake of argument) that the Beijing government does in fact keep the Chinese yuan undervalued."Is there a debate over whether it's being kept undervalued or not? CRC Whether or not there's widespread debate over this point it's worth noting the assumptions/presuppositions behind an argument. Assumptions and presuppositions are very often hidden or unstated and can lead to confusion later in a discussion. Mathieu Bédard Hence my question. Justin P But the Chinese government would never do anything to hurt their people would they? /snarkI'm confident that Muir and Dan can square this circle. How an over powered intrusive government consistently hurts rather than helps their own people. danielkuehn I was thinking about commenting, but nowhere near what you expect me to say.I was going to say that Don's point that a manipulated currency clearly hurts the Chinese. To the extent that anyone says it "helps" them it must implicitly be refering to something more specific: helps their exporters, for example. Because obviously it doesn't "help" on net. That is clear, unless you're Harold Meyerson or someone like that.What I WAS thinking about asking is why Don seems to suggest that while currency manipulation hurts the Chinese on net, it helps Americans. Don often talks about how "we might as well enjoy the cheap Chinese goods", etc. etc. That is the side of his argument that I find hard to swallow, not the argument that it hurts the Chinese (which I think is fairly obvious).Put it this way - if Don thinks that a weak yuan is good for the U.S., why doesn't he advocate the deliberate pursuit of a strong dollar? Methinks1776 we have a strong dollar - against the yuan. Currency strength is relative to a specific currency. martinbrock Right. The relative "strength" that matters is the difference between the price of yuan in dollars at the fixed rate and the price if the rate were not fixed.China's monetary authority can only fix this price by selling yuan below the market price. It can't fix the price above the market price, because doing so requires that it continually buy yuan with dollars, and it must run out of dollars this way eventually, because it doesn't create dollars. China's increasing dollar reserve implies that the fixed exchange rate is below the market price.If China's monetary authorities only bought real U.S. assets in the real market with these dollars, U.S. sellers of the assets could only benefit, but they don't buy real U.S. assets. They buy entitlement to U.S. tax revenue, and only our own government can sell it to them.Creating these Treasury securities backed by forcible confiscation is not China's doing. It's our corporative state's doing. If China could only buy ever riskier mortgage backed securities with its increasing volume of dollars, without any implicit guarantee from taxpayers, this purchase couldn't hurt us.So China finances my occupation of a home I can't afford for a while. Then I default. So what? I live in a house I can't afford for a while, then I move into one I can afford. How does that harm me? This sort of thing should (in a freer system) be the consequence of China's mercantilism.So the problems (for us in the U.S.) with the current account deficit created by China's gift of free yuan to U.S. consumers is created by our government's sale of entitlement to tax revenue and other forcible guarantees of a "return" on China's "investment" of the dollars it accumulates by selling yuan below the market.The other forcible guarantees, the ones we rarely discuss, frighten me even more, precisely because we don't discuss them and don't really understand their extent. These guarantees are things like international patents. Our own government is largely responsible for internationalizing patents and other forcible monopolies during the Reagan administration.When China stops subsidizing exports, we'll need to retreat along the developmental trajectory we're on, by producing more of the goods that China now produces for us at subsidized prices, but we can't do that if our own government has passed laws against it, and it has.The longer China's mercantilism persists, the worse this problem becomes, and because China is so much less developed (even now) and it's population is so much larger (and so captive), the policy can continue for a long time. We'll keep adjusting to it, but we'll adjust to it by moving further along a developmental trajectory that is unsustainable when the policy ends, and when our place on this trajectory becomes unsustainable, our own government will threaten to shoot us for trying to compete with China's production. Barbarossa Assuming your reasoning is without flaw, you have to a minor degree vindicated my stance, unintentionally. Applauso. Thank you for pointing out that this currency-peg arrangement is essentially collusion between our government and China's, something which I have asserted many times and something which, as you indicate, changes the game entirely. Barbarossa The arrangement between Beijing and Washington is essentially the same as Washington forcing American consumers to purchase Chinese goods which would, under free-market conditions, be less competitive or more expensive than American goods (do we not argue that higher wages mean higher productivity?), but because the governments force this currency peg, which continually requires Beijing to support the dollar, Chinese goods are artificially cheap and competitive with respect to American goods, driving out American manufacturing and benefiting the American service economy. Now, in reality, under a free market, Chinese goods aren't more competitive, but the respective governments have effectively made them so. No real capital is freed up as a result of this process, since in reality these "cheaper goods" represent capital squandered by government borrowing and forced purchasing of foreign goods, purchases that would normally represent a loss of capital and would normally be foregone instead for American products. Hence, this is not, in the long term, a mutually beneficial but a mutually destructive relationship, as the Chinese accrue greater American debts which may never be repaid and we experience an increasingly eroded manufacturing sector, which is our only hope of ever repaying this debt. It's basically malinvestment on a grand scale. The misallocation of resources can continue seemingly indefintely but of course must eventually come to an end. Other areas of the American economy experience an expansion in production or an increase in wages, such as the service sector, but this is a bubble phenomenon, an illusory and ultimately unsustainable development, while the manufacturing sector shrinks and our balance of payments skyrockets. Again, if the current account, trade deficit, etc., don't matter, then why not allow them to increase to several times GDP? What would it matter? Barbarossa This whole arrangement and others like it actually supports a crazy "cosmic" theory, if you will, that I have entertained for some time, and which may yet prove to be accurate. I sit and wait. Even those who SHOULD believe such a theory are likely disinclined to take it seriously, but then so was the case with Mises for so long, and still is. Barbarossa I would like to add/clarify, that, in my (quite possibly flawed view), there can't be any net capital increase or transfer to the United States as a result of this arrangement and that there must be mutual capital destruction. It's kind of akin to a bailout of sorts. It's like forcing someone to buy from the second-best competitor, except that competitor "benefits" because his sales are based on vendor-financing--a pyramid scheme, basically. Barbarossa Government debt is bad for tPrevious post: On Crime and Consumer Credit
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