I really wonder sometimes about Treasury Secretary Tim Geithner. He has been making the rounds for some time now telling anyone who will listen that he wants a weaker dollar. And he’s been successful because the dollar has been tumbling. Now, he might protest that he really does not want a weaker dollar, but a stronger yuan (China’s currency). OK. If the yuan is stronger, then by definition the dollar has to fall doesn’t it?
Let’s check out what he has been saying as reported in this MarketWatch.com piece[emphasis in the original]:
Treasury Secretary Timothy Geithner called for China to allow "significant, sustained appreciation" of its currency Thursday and said the Obama administration was exploring "what mix of tools" might encourage Beijing to allow the yuan to rise at a faster clip. "China needs to allow significant, sustained appreciation over time to correct this undervaluation and allow the exchange rate to fully reflect market forces," Geithner said in testimony prepared for the Senate Banking Committee. Geithner will also talk about the yuan with the House Ways and Means Committee this afternoon.
"It is past time for China to move," Geithner said…
Why exactly does Secretary Geithner want the dollar to fall and the yuan to rise? Your guess is a good as mine on that topic, but let’s think through what this means.
To start, the dollar is falling versus the yuan. Apparently, not enough for Tim Geithner though. Unfortunately, the dollar is falling versus other currencies too. It’s falling against the Japanese yen, the Euro, the Swiss Franc and other currencies.
The tumbling dollar
Conversely, gold, oil and other commodities are rising because the dollar is weak. A weaker dollar means we pay more for foreign oil. Great. But we also pay more for any goods denominated in any rising currency. With a falling dollar, 300 million American consumers must pay more for goods made in China, Japan and elsewhere. Is that a good thing? I really don’t think so, but apparently our Treasury Secretary does.
The argument for being aggressive against China runs something like this:
The Chinese have deliberately kept their currency weak to encourage exports to the U.S. and other countries. That hurts American manufacturers who have cut employment here at home. If we force China to strengthen its currency, that could help manufacturers here add jobs. If China refuses, we will take steps to enforce trade restrictions and other means to bring them in line…
Congress believes U.S. manufacturers are hurt by this and they want the yuan to be more expensive so American goods are more competitive here at home…
OK. Even though this argument is full of ifs and buts, let’s take it at face value. The Chinese are trying to keep currency rates lower so they can sell us cheaper goods. I, for one, am happy that China wants to sell me cheaper goods. In my crazy, mixed up view, cheaper is better.
Let’s also take for granted the 1 million jobs figure that’s tossed about. On the one hand, we might increase jobs making T shirts, plastic toys and other goods here at home. On the other hand, 300 million Americans would pay more for many things they buy. Does that trade-off really increase prosperity?
Who benefits?
Does anyone believe the crack U.S. Treasury can somehow weaken the dollar versus the yuan, but keep it strong elsewhere? Obviously not. So, we have a weaker dollar which means we all pay more for foreign products and, if Congress gets its way, we may even trigger a trade war. Nice.
Before you accept at face value the orchestrated campaign against China and its currency, you may want to do what I always try to do which is ask, who benefits?
Update:
One of my commenters gave the standard answer that we would get more jobs if the yuan were stronger. We might…or we might not. The problem with that response about creating jobs is that there is no actual evidence this is true. I know a lot of politicians say this, but stop for a moment and ponder this.
Let’s say the yuan appreciated by 5% versus the dollar. A $15.00 T shirt made in China would now cost $15.75. Does anyone think a savvy entrepreneur is going to start making millions of T shirts here in the U.S. because of that factor? C’mon. The basis for creating a job — or not creating a job — is far more complex than just a small currency change.
On the other hand, 300 million Americans would now have to pay 75 cents more for T shirts. That’s a dead weight cost of an extra $225 million per year. That’s a cost that will hurt Americans.
Update ll:
Another commenter suggests we are thinking too small. Somehow, magically I guess, a stronger yuan would lead to all sorts of manufacturing here at home. There is only one problem with this thinking. We already are manufacturing lots and lots of items. However, we tend to eschew the type of commodity items produced in China. If you think we are not manufacturing anything much these days, look at this chart of manufacturing output coupled with one other important factor, manufacturing jobs:
Source: Carpe Diem
The blue line shows manufacturing output which has going up steadily for decades. It dips during recessions and then resumes growing. However, due to productivity gains, manufacturing jobs have fallen steadily for decades as shown by the red line. Why? Because we can make stuff much more efficiently these days.
This trend is true not just in the U.S., but all over the world and that includes China. Manufacturers are so much more efficient today that they need fewer workers. Does anyone things a decades-long trend is going to change due to a slight currency fluctuation?
If you think this huge expansion of manufacturing productivity is a bad thing, consider this chart of farm labor. Once upon a time most Americans worked on the farm, now only 2.6% of Americans produce all the food we need. Is that bad? And, whether you think it is bad or good, this trend was irreversible.
Source: Carpe Diem
200 years ago, we all worked on the farm at a subsistence level. Now, very few do. Someday, manufacturing will only employ a few percent of American workers. I think this is a good thing, but it’s going to happen whether we like it or not.
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America benefits, that’s who. American manufacturing jobs. You might have to pay more for a cheap toy from China but the benefit to keeping manufacturing here in America far outweighs any increase in costs.
One thing the artificially weak Yuan does, besides giving you the opportunity to buy cheap stuff, is to foster a large and growing trade deficit which can only be paid for through the incursion of debt (public or private). Since the private sector (e.g. households and businesses) have gotten on with the rather unpleasant task of deleveraging their respective balance sheets that leaves the public sector as the last borrower left to finance the trade deficit. Mr.Geitner, rightly so, believes this situation to be unsustainable.
There are ways other than currency manipulation to correct the trade imbalance such as “buy American” campaigns, productivity gains, or, heaven forbid, we create an environment within our borders that is favorable to the competitive instincts of business.
But, in the end, you can’t keep borrowing money (or printing it out of thin air) indefinitely to finance your acquisitiveness, even if that Korean made flat screen is really cool!
NoeValleyJim–Show me how that works. Are you suggesting the cheap plastic toy manufacturers are a strategic manufacturing asset for us? Right.
Let’s say a T shirt made in China costs 50 cents more due to a stronger yuan. Is that really going to translate into more American jobs offsetting the higher costs we all pay? Do you really think we’ll see a boom in T shirt manufacturers here? I don’t.
It’s not just about cheap crap. It’s about the other things that are being manufactured there that could come back. Things like furniture, machine equipment, power tools, precision machined goods, car parts, pumps, solar panels, wind turbines; you get the idea. High dollar, high quality goods that were once made by middle class Americans. Once the Chinese started making those kinds of things so cheaply, the manufacturing base hit the tipping point and now most of those kinds of goods that require that level of manufacturing technique can be made in China cheaper. A cheaper dollar would negate some of the price advantage and would allow for that kind of manufacturing to resume here again since it would be cost effective.
Stop thinking tactically and start thinking strategically. Tactically it may be better for the consumer to have access to the cheaper Chinese goods. Strategically we lose manufacturing jobs to the Chinese and our great middle class shrinks considerably, leaving fewer people that can afford the goods still manufactured here. We will be a country of rich and poor, with very little in between. The middle class drives the consumer society as well as pays the bulk of the taxes that run the government and pays for the roads and services. Let the Chinese keep the T-Shirts and plastic toys. We need to rebuild our middle class, not build theirs.
We can thank all of the free traders out there for this mess. Once we started on that slippery slope, there will not be any respite for the American middle class until there is parity around the world for everyone's middle class. We may have to wait until China gets their middle class established before the hemorrhaging of American jobs will stop. It would be tragic if we had to wait for Africa to establish a middle class too.
Mark–Again, I say show some evidence instead of just spouting rhetoric. U.S. manufacturing output is at record levels, but U.S. manufacturing jobs have fallen dramatically because of higher productivity. It’s a myth that we don’t make things anymore.
Productivity in manufacturing has risen around the world so manufacturing jobs have fallen. A 5% change in currency rates won’t make any difference in this trend. Protectionist trade restrictions won’t make a difference either. Look how well protectionism worked for U.S. auto companies.
C’mon folks. Look at actual evidence, not politically-inspired rhetoric.
I don’t know if these are the writers true beliefs or if he just thew this piece up to spur heavy debate in the comments section. What is your background. Do you have any knowledge of how markets work?
In the short run, it is nice to be able to purchase goods from other countries at a low price. Unfortunately if you are buying more goods than you are selling, which America has been doing for years, you slowly run out of money. In a free market this corrects itself, as we run out of money, our currency drops in value and we start selling more than we buy. When China pegs their yuan to our dollar this correction never occurs.
The question is you ask at the end of your piece is, who benefits?
The people that benefit are, the people that usually benefit, the currently wealthy. They have amassed large amounts of American dollars. If the dollar drops in value, their purchasing power drops significantly. They have already made their fortunes. They can invest in foreign markets and allow dollars to work for them there.
Who does it hurt?
The middle class and poor who need to work to earn money. They do not have a large amount of dollars stored up. They are competing with laborers in other countries that can be paid much less in dollars and still earn a good living. If you are making $20,000 dollars a year but that converts to $80,000 in your local currency, you are making a good living.
So if we continue to artificially pump our currency, we will be able to buy cheap crap at Wal-Mart but more and more Americans will fall below the poverty line.
Decisions are made at the margin. China doesn’t sell T-shirts for $15.00 because it costs them $15.00, they sell T-shirts for $15.00 because that is what people are willing to pay.
If I have two people to buy shirts from, one sells their shirts for $15.00(China) and another sells their shirts for $15.01(America). What shirts are you going to buy? (assume the shirts are identical) You won’t buy some $15.00 shirts and some $15.01 shirts. You will buy all the $15.00 shirts. The person that sells the $15.01 shirts won’t sell a single shirt. He can either drop his price, or stop selling shirts. Now the currency bumps 5%, so the $15.00 shirt costs $15.75 not only do all the people that are selling shirts for $15.01 join the party, but people selling shirts for $15.02-$15.74.
This is an extremely simplified example, but not nearly as simple as your article.
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