Thursday, March 18, 2010

Steve Forbes: We Have a Fixed Currency IN the US




Steve Forbes at about 2:46 talking about China's fixed ex-rate at 6.83 Yuan per dollar since the summer of 2008:

"Fixed currencies - we should be in favor of them, because it makes life easier. We have a fixed currency between California and New York, and it's a good thing."

Related:
Greg Mankiw's view on China's currency.

"Critics of China say it is keeping the yuan undervalued to gain an advantage in the international marketplace. A cheaper yuan makes Chinese goods less expensive in the United States and American goods more expensive in China. As a result, American producers find it harder to compete with Chinese imports in the United States and to sell their own exports in China.

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy."

18 Comments:

At 3/18/2010 2:49 PM, Anonymous Anonymous said...

There is, however, another side to the story. The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy.

China's Communist Party, which values control above all else, strives to maintain a growth at all costs policy. This growth is dependent on cheap exports that often have razor thin profit margins. In order to continue shipping its huge bulk of exports, China is forced to keeps its currency artificially low by purchasing foreign currency reserves (such as the USD). While this does make China's exports cheap, fuels its growth and gives Western consumers cheap goods, it unfortunately does hurt the real economies of Western nations - as evidenced by the anemic 'recoveries' we've been seeing. While China can continue purchasing foreign currency reserves, thus artificially lifting Western consumers lifestyles, China is continuing trade relations that are artificial, and thus not sustainable - particularly while China remains so highly dependent on exports, despite her recent attempts to turn consumerism inwards.

There's a growing chorus of analysts who are not so sure China can maintain its amazing growth, and that it may in fact have a bubble of colossal proportions in the works. With Europe's currency problems plus America's own uncertainty (a lot of people are concerned about the corporate debt clock that will go off in 2012), seeing a major trading partner hemorrhage blood would devastate China's export engine; however, some analysts believe China may have plenty of internal problems - a monster real estate bubble, a surprisingly bad debt-to-GDP ratio among others things - that may also burst her economy.

China's demographics are truthfully very fragile. A major bubble burst could spell huge consequence to a Communist Party that still recalls the Cultural Revolution. Again, while China's currency manipulation has brought the world cheap consumer goods, it's also hurt the real economies of the West by ravaging their industries and hurting the services/necessities that were created because of them - schools, infrastructure, basic civil services, etc.

While it may seem plausible to have China continue making these goods cheaply, and buy our currency reserves, it may be ultimately a dangerous situation to put so much the world's supply chain dependent on one nation. If Jim Chanos is correct, in that China will be 'Dubai times 1,000,' we may think twice in the future before letting another nation take over much of our textile industry.

Here's a question: if the real unemployment is closer to 17% (rather than the reported 'official' rate) and we're in a jobless recovery, what happens when the bottom comes out on the 'recover' - how much further will unemployment shoot up? 2012 doesn't look good.

 
At 3/18/2010 3:29 PM, Blogger sethstorm said...

Steve Forbes at...
At some point, junk-cheap goods also eat away at what opportunities are left for the US (at a given point in time). While the pie does indeed grow, it also eats away at the same time.

• They're always "lower" than the US such that they are cheaper by the whims of the CPC
• Said low prices provide an incentive to cut corners (such as melamine in dog food, lead in toys, milk with no nutritional value, consistently lower quality[even counting for China's standards])
• Government and business are one in the same. See Google for what can happen to non-compliant businesses and forced 'donations' of organs for non-compliant citizens.

They aren't going to go the flight-to-quality route that Japan did. If they do, it will be on a multi-generational scale. It would be better to retaliate now, take our lumps and let China collapse.

The regulatory and currency issues do need to be fixed in our favor. China needs to play by our rules in our land. If they play regulatory games, deal with them as swiftly as China deals with foreign companies. It would only be consistent to treat them as they treat our US businesses (Lenovo-like business structures == Chinese-run with localized faces for the sake of argument).

Regulatory (and currency) arbitrage for political ends is fun and games until folks start suffering for it. On both ends.

--
Then again, this is Forbes; they have a natural contempt for the Midwest/Manufacturing Belt (namely their sustained attacks on Ohio cities being beyond the pale). Anything that puts those regions at a disadvantage (such as China and other similarly tasked Third World countries) is ok by Forbes.

Forbes is the kind of entity that would use offshore labor to subvert US market responses as well as using it as a political tool.

 
At 3/18/2010 3:34 PM, Blogger Redbud said...

So the US wants to break the fixed peg because only the US should have advantages? It's bad for communists to seek growth at all costs, but good for the US to do so? It's bad for China to lift Western lifestyles, but good for the US to dampen Chinese lifestyles? It's bad for China to be dependent on exports, but good for the US to do so? It's bad for China to have a bubble, because the US can't blow another one for itself? The US chose to become dependent on China, but China must damage itself to return all advantages to the US?

And folks wonder why the US is become less and less well regarded in the world community.

 
At 3/18/2010 3:37 PM, Anonymous gettingrational said...

Steve Forbes writes "Fixed currencies - we should be in favor of them, because it makes life easier. We have a fixed currency between California and New York, and it's a good thing."

Mr. Forbes is against a market for Chinese currency becuase it's easier. All of the signers to WTO and IMF agreements should agree to a fixed currency then. That is not the situation because other major currencies have a market. He should be arguing for a new international currency regime and not for currency control by one country.

Anon. 3/18/2010 2:49 pm has given a very possible scenario and that is hidden GDP/Debt ratio that is radpidly climbing. The bubble is building with foreign reserves being used to fund bonds sold to back shakey bank loans.

 
At 3/18/2010 3:53 PM, Anonymous morganovich said...

forbes should know better. that's an incredibly oversimplified position.

sure, we have one currency in the US and it works for us, but that does not mean that having one world currency is a good thing.

there's a whole raft of economic literature about "optimal currency areas".

in a nutshell, it's always a trade off between the reduction in transactional friction and increased predictability of a single currency and the increased flexibility in terms of interest and exchange rate policy that allows economies to adapt to idiosyncratic shocks.

it might well be that china and the US are better served by one currency than say michigan and texas, but i doubt it.

and, as we are seeing in the EU, unified currency without unified fiscal policy creates ugly hazards.

 
At 3/18/2010 5:36 PM, Blogger OA said...

The Yuan exchange rate is just a convenient bogeyman to blame for job losses.

If the Yuan were floated, there is not going to be a flood of jobs coming back to the US.

The US isn't 2nd cheapest for production costs after China. Not even close.

Any production that moved would mainly migrate to other developing countries in Asia, South America, and Eastern Europe. Maybe even the Middle East and Africa depending on the product.

In addition, many US manufacturers use components and materials made in China. So they would see varying degrees of cost increases. Ripple those cost increases through the consumer side and the business side, and some jobs are bound to fall out.

Exports will benefit. Although much of that purchasing power is going to boost other countries' exports more than the US. Australia sells beef and wine as well, and there's a limit to how many Chinese can buy Harleys. Lots of food products would come from the US, but thinking there's going to be a huge net increase in US jobs ignores the economics.

 
At 3/18/2010 6:28 PM, Blogger sethstorm said...


If the Yuan were floated, there is not going to be a flood of jobs coming back to the US.

The US isn't 2nd cheapest for production costs after China. Not even close.

Then create a common profile of those countries and extend it globally. Essentially - you play on our turf, you play by our ruleset and on our level. No purposeful/otherwise debasement(and maintenance thereof) to undercut our country allowed.

For the most part, most of the First World does cooperate in that regard.

If you're really wanting to deal with it, consider making the NATO definition of the First World a trade bloc of its own. That is, the developed nations for which are seeing work depart them regain a scale that outnumbers the Third World. Use that as a way to counter the effects of China, Mainland SE Asia, subcontinental India, Central Asia, Africa, Central America and South America, but not in a way that turns it into the (worst-case) EU.


China's Communist Party, which values control above all else, strives to maintain a growth at all costs policy.

Even if it means they adopt cronyism that can't really fit rent-seeking due to the way they run it. Business and government are integrated enough in that regard that political freedom (such as how their government on the whole is composed and run). The businesses provide some economic stability and modernity; the government makes sure there that opposition is cleared away(in any way possible, including arbitrary imprisonment/forced disappearance/death).

Disincentivize the use of "hellholes" for focus on economic expansion.

 
At 3/18/2010 6:49 PM, Anonymous Endurance said...

OA states " Lots of food products would come from the US, but thinking there's going to be a huge net increase in US jobs ignores the economics."

Lots of food products coming from the U.S. is correct but there are many other goods and services with huge potential. BUT, are other issues have to be dealt with:

Intellectual Property Theft
Revolving certification standards
Forced Joint Ventures (syn.: tech transfer)
China's Famous Brands Iniative
China has not signed WTO government procurement agreements as promised
China's intellectual property development iniative drive
government heavyweight industrial development emphasis freezing out foreign competion

Consumption is a huge parameter that includes not only individual but organizatinal purchases such as hospitals, ports etc.

 
At 3/18/2010 8:18 PM, Anonymous Pingry said...

Does Steve Forbes even have a clue that the US and China do not constitute an optimal currency area?

Is he even familiar with the literature on OCA's?

Does he even know what an OCA is?

What a dope

--Pingry

 
At 3/18/2010 8:41 PM, Blogger Charles Platt said...

Forbes' remark is clever, but he reaches the wrong conclusion. Just because the United States has only one currency, does not mean that this is beneficial. Consider the advantages of each state having its own currency. Multiple competing currencies (which incidentally used to exist) would remove the protection that less-efficient states currently enjoy.

The EU has not necessarily benefited from a uniform currency.

 
At 3/18/2010 9:47 PM, Anonymous Pingry said...

More stupidity from Forbes:

He also claims that China outsourced monetary policy to the Fed since the early 90's.

Again, he's wrong. There's a reason why the Chinese tightly control capital flows, because they want a fixed nominal exchange rate and an independent monetary policy.

Only by allowing capital to flow freely in the presence of a fixed nominal exchange rate would China be outsourcing monetary policy to the Fed.

--Pingry

 
At 3/19/2010 3:29 AM, Blogger OBloodyHell said...

> The loss to American producers comes with a gain to the many millions of American consumers who prefer to pay less for the goods they buy.

It's more than that -- they are effectively taxing their own people to buy goods for Americans.

It's a stupid, ineffective policy fully in line with the sort of genius associated with Mr. Keynes.

 
At 3/19/2010 3:34 AM, Blogger OBloodyHell said...

> It would be better to retaliate now, take our lumps and let China collapse.

Yes, by all means, let's piss off the country with the world's largest army while we owe them lots of money.

A nation with an excess of males, which historically has ALWAYS led to military aggression as a means to provide an outlet for the excess males.

Great idea, geeeenyus.

Not saying we can't win a fight, just that it won't be easy or pretty. You think Iraq was bad? Geez. Wait till you learn what a REAL war is like.

Moron.

 
At 3/19/2010 3:55 AM, Blogger OBloodyHell said...

> Lots of food products would come from the US, but thinking there's going to be a huge net increase in US jobs ignores the economics.

OA, you have the basics right, but haven't really fully fleshed out the reasons.

WE ARE NOT A MANUFACTURING ECONOMY ANY MORE. We haven't been that since around 1970, when economists began using the term "post-industrial" to refer to our economy.

Since that point, we have been in the process of becoming an "IP And Services Economy" -- the world's first.

Just as the Ag economy fell by the wayside, and all food production was easily handled by a mechanization-fueled 2-3% of the population, so, too, can our manufacturing side, fueled by roboticization and mechanization, become at most 2-5% of our population.

What does the other 92-96% of the population do?

IP and services. We make movies. We make music. We make TV shows. We win Nobel Prizes for science. We produce more patents per capita than any other nation. BY FAR.

All future substantial wealth increases will come in the IP and services sector. NOT food, NOT goods. This is where all the wealth increase in the 1990s came from. Hell, it's where the wealth increase we got in the 2000s came from, that wasn't thrown away in the housing bubble.

This call for "more US manufacturing" is stupidly ignorant and worthless.

IP is where it's at because there isn't another nation which has the capacity to do what we do with IP. Our movies sell around the world. Our TV shows are popular everywhere. If your music sells in America, chances are it will also sell in a lot of other places.

This is because of our experimental, adoptive, and polyglot nature as a nation.

We welcome those from other cultures, learn from their culture, appropriate what has wide-spread interest, and make it our own. Unlike the French, who "protect" their own culture to the point of actually banning foreign loan words, we embrace other cultures, and freely adopt what works from them.

That's why our IP not only IS the best, it's going to STAY that way for the foreseeable future. Because no other nation is so willing to embrace new things, to make entire swaths of paradigm shifts in a decade or less, as new ideas and ways of looking at things come available. Combine that with our gigantic, inherent "test bed" for new ideas (if it has widespread appeal here, it has widespread appear for the entire world), and you have an unstoppable engine for creating IP-based wealth.

We don't NEED manufacturing. If some nation we "depend on" craps out, we will either get yet another nation to pick up the slack, or we will just build a robotic plant to make it for ourselves using a fraction of the population required to make it elsewhere inside of a couple years.

No, the reason for encouraging China to turn to business is that aforementioned innate jingoistic quality inherent in a predominantly male population.

If China's business end is there, then the Chinese males can compete financially and economically for resources to woo Chinese women with. They don't have to steal them with a military. And for the only time so far in human history you might not wind up with a nation at war to deal with excess males.

 
At 3/19/2010 6:20 AM, Blogger sethstorm said...


We don't NEED manufacturing. If some nation we "depend on" craps out, we will either get yet another nation to pick up the slack, or we will just build a robotic plant to make it for ourselves using a fraction of the population required to make it elsewhere inside of a couple years.

I'd have to call shenanigans on that (for lack of a more descriptive word of the situation). First of all, the military does have a certain 'national security' imperative.

Second, you speak of it as if it was used as a weapon - you consider US citizens to be the enemy. That is, there is no room for a manufacturing sector, and that it must go even if there is more than enough economic room for it.

Where's McCarthy when you need him?



All future substantial wealth increases will come in the IP and services sector.

In other words, you just want a bunch of IP lawyers and easily dumped, second-class permatemps.


Yes, by all means, let's piss off the country with the world's largest army while we owe them lots of money.

Call their bluff, while it still results in their collapse.

 
At 3/26/2010 10:43 PM, Blogger OBloodyHell said...

> First of all, the military does have a certain 'national security' imperative.

Well, I'd call "shenanigans" back on you, but I'd never have time for anything else if I started doing that with your posts.

Aren't you the one who was kvetching elsewhere on the blog about military spending?

Further, I could be wrong, but most of the stuff we actually sub out is older stuff that we also sell on the world market. The top-end stuff might get built in Japan or Korea, but I don't see them crapping out anytime soon. And I'm sure we've got adequate back-supply of parts and stuff to make it long enough to get that supply chain cleared up.

It's one reason there's a certain amount of reserve steel kept in stock, ditto oil. To deal with supply interruptions that have national security consequences.

Of course, you have NO IDEA about any of this, of its even being done, or who is in charge of it, or why.

> Second, you speak of it as if it was used as a weapon - you consider US citizens to be the enemy. That is, there is no room for a manufacturing sector, and that it must go even if there is more than enough economic room for it.

Again, shenanigans.

WT >>>>> F <<<<< are you talking about?

There's room for a manufacturing sector. It's 2-5% of the population.

I don't see you screaming for vastly increased farm employment. Why is manufacturing so precious to you?

Oh, because you cannot, even when it's waved in front of you, grasp that they are much the same these days: "Old Economy".

> In other words, you just want a bunch of IP lawyers and easily dumped, second-class permatemps.

And, again, shenanigans.

Dumbass:

IP creators are hardly low-paid temps.

Musicians, artists, craftsmen, movie makers, writers, programmers, scientists...

F'in DUH, you incompetent moron?

And that's not even all of it -- a technical world does require technical skills in general... Tech support on all levels, customer service, these ARE industries which are woefully under-appreciated. As time passes, they will get better as people realize that they need to reward companies which provide good service, that it's worth it to them to NOT have to talk to some semi-understandable Indian in a tech sweat shop in Kuala Lumpur (and yes, I know where that is), instead of someone for whom English is not a foreign language.

A lot of that tech outsourcing which was occurring in the early 'aughts has been coming back, because the benefits that seemed to be there were counterbalanced by a lot of negative things previously unseen.

Programming, Tech Support calls, etc., tend to be much more in-country than they were just 7 years ago. The only things which have stayed outside the USA is the mindless grunt work -- cels for animation would be an example here: the main storytelling is entirely done here, but the dull, boring, and highly repetitive (read: "does not require education or creative talent in any way, shape, or form") grunt work of doing individual frames is getting done by others.

...(continued)...

 
At 3/26/2010 10:46 PM, Blogger OBloodyHell said...

...(from above)...


> Call their bluff, while it still results in their collapse.

You are SUCH a moron.

As a result of its "one child" policy, combined with a rather foolish attachment to males, China has an overbalance of males in its population (Hence, foolish: smart Chinese parents realized this was happening and wanted girls, because girls will have their choice of males).

Historically, for human societies, there is ONE WAY to deal with that. The nation gets jingoistic, picks a fight with someone, and war results in order to:
a) burn off the excess males by a somewhat Darwinian process
b) provide the winning males with goodies to use to woo the females.

NOW, this MIGHT not happen if China isn't pushed too hard, as in "right now", because if China becomes an economic power, then that allows the males to compete for the attentions of females by economic means rather than having to steal it from some other nation.

Because the fact is, an economically competitive China is a good thing for the world. A jingoistic China with a million man army and a need to use it somewhere "RIGHT NOW" is anything but.

Q.E.D., Seth, you're an ignorant dumbass with no idea of the widespread consequences of that which you argue in favor of.

 
At 3/26/2010 11:00 PM, Blogger OBloodyHell said...

Get this, Seth: China's historical "nemeses" are Japan, Korea, and India. Add to that Taiwan.

THAT is who China will be competing with in manufacturing.

NOT US.

WE will be in an entirely different economic sector with next to no competition.

AT ALL.

Because there's not a nation on earth that can come close to competing with us right now in IP and services.

France has some pitiful nationally protected efforts in that regard. They will never compete with the USA because they suffer from severe NIH syndrome, while the USA embraces every good idea it comes across. "NIH" doesn't work in IP. "What works" is what works in IP.

Australia/New Zealand might manage it, but they're a good 30-50 years behind us in general development, and the Aussies are attempting very hard to go the British "National Suicide" route instead.

But YOU? No, YOU want us to actually go BACK into an economic sector we've long since abandoned as "no longer worth it", where we can compete with half the world's population...!!

"BRILLIANT!"

Yeesh. You're "too dumb to pour piss out of a boot if the instructions were printed on the heel". Literally.

 

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