Sunday, February 25, 2007

Why Should We Complain About Overvalued Dollar?

George Mason economist Don Bodreaux makes a good point that Americans are beneficiaries of an overvalued dollar vs. the yen or yuan, so why should we complain about bargain prices for Chinese and Japanese goods?

There's an even deeper reason why Americans should not tolerate Uncle Sam accusing foreign governments (like China and Japan) of undervaluing their currencies. Such undervaluing -- if, indeed, it occurs -- benefits Americans.

Keeping in mind that it is difficult to determine whether or not a government truly is keeping the value of its currency too low relative to the dollar, let's assume (for argument's sake) that the Chinese government really is doing so.

How does it achieve this outcome? Answer: The Chinese government must buy up dollars and keep them out of circulation. By reducing the supply of dollars on foreign-exchange markets, the value of the dollar rises relative to other currencies, including that of the Chinese yuan.

In other words, the value of the yuan falls against the dollar.

Now ask: How does the Chinese government buy these dollars? It can do so only by taxing its citizens, either directly (such as by raising their income taxes) or indirectly through inflation -- simply printing new yuan -- or deficit financing. Each of these policies transfers money from the pockets of Chinese citizens to the coffers of the Chinese government. This government then uses these yuan to buy up dollars.

The ultimate result is that the Chinese government forces Chinese citizens to subsidize the consumption of Americans and other peoples who import goods from China. The Chinese people either pay higher taxes or suffer inflation so that Chinese exporters can sell goods to foreigners at artificially low prices.

Why should Americans complain? The real victims of such currency manipulation are the Chinese people. Americans are beneficiaries.


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