Tuesday, November 01, 2011

China Manipulates Its Currency To the Advantage of U.S. Consumers and Businesses Buying Its Products

At an event hosted last week by The Aspen Institute "Is U.S. Trade Policy Helping or Hurting Manufacturing?" featuring former U.S. Trade Representative Susan Schwab and Jared Bernstein, there was a lively debate on a number of issues relating to trade and manufacturing. While there were differences of opinions on most topics, there was a strong consensus (including among the attendees) on one topic: China is a currency manipulator. Here are the details of that consensus, as I understand it:

1. China manipulates its currency by keeping the dollar overvalued and the yuan undervalued.
2. That currency manipulation gives China an economic advantage that harms the U.S.
3. The U.S. and other countries should individually or collectively take steps to persuade or force China to stop its manipulation.
4. Solutions to China’s currency manipulation range from direct legislation like the bill passed in the Senate that will impose stiff tariffs on Chinese goods if the Treasury finds evidence of currency manipulation, to other forms of indirect pressure on China to persuade it to stop manipulating its currency.

Let me break from that consensus and present an alternative position:

In the best of all possible worlds for the U.S., China would use its labor and capital to manufacture consumer products like clothing, footwear, furniture, electronics and appliances and send $300 billion worth of these products to U.S. consumers for free every year, as a gift, or a form of foreign aid to the American people. In addition, the Chinese would produce and send to America another $100 billion worth of raw materials, parts, industrial supplies, inputs and natural resources at no charge, as a gift to American manufacturers every year.

Can there really be any argument that such an arrangement, where America would receive $400 billion worth of free goods every year from China, would be to the unquestionable economic advantage of the U.S.? (Note: That’s roughly the amount of goods we will purchase from China this year.)

However, that extreme Chinese generosity is probably not realistic. Here's a second best outcome:

Instead of sending $400 billion of goods annually for free, China offers an attractive alternative. It will send us $500 billion of goods every year, both consumer goods and industrial goods, but will sell us those manufactured goods at a substantial 20% discount, for only $400 billion. In that case, the amount of foreign aid will be less than the $400 billion in the first case, but will still be significant - a $100 billion gift every year from the Chinese people to the American people.

How will China generate the $100 billion in foreign aid to the U.S.? One way is to keep its currency undervalued to bring about the 20% discount on its products.

Which then raises the question: If China is willing to undervalue its currency and in the process provide $100 billion of foreign aid annually to the American consumers and businesses buying Chinese products, what’s the problem? Why should we complain?

And that is my main point: the "manipulation" of China's currency is actually to the distinct advantage of American consumers (especially low-income Americans) and American businesses buying products "made in China." They certainly aren't complaining about low-priced Chinese products, and in fact would be made worse off if China was forced to revalue its currency and in the process make its products more expensive to Americans.

So if neither American consumers nor U.S. import-buying businesses would benefit from a stronger yuan and a reduction in China's "foreign aid," who would really benefit? The same groups that always benefit from protectionist, mercantilist trade policies: domestic producers who compete against foreign rivals. 

We know from economic theory that protectionist tariffs produce benefits for domestic producers, but also higher costs for domestic consumers. Further, the costs to consumers from protectionism are greater than the benefits to producers, resulting in a net loss for the country and a reduction in its standard of living.

Likewise, I would argue that forcing China to appreciate its currency would be equivalent to a protectionist tariff on Chinese goods, and would make American consumers and import-buying companies, and the country as a whole, worse off.

Summary of my position on currency manipulation:

1. China's currency manipulation is a form of foreign aid, and to the direct advantage of millions of U.S. consumers, especially the poor and low-income groups, and to the direct advantage of thousands of American companies buying inputs from China. 

2. Forcing China to revalue its currency would benefit some American manufacturers competing with China, but would significantly harm those American consumers and businesses currently buying undervalued imports. On net, there would be more harm to American consumers than benefits to American manufacturers, making the country worse off.

3. Like other forms of mercantilism and protectionism, revaluing China’s currency would favor certain domestic producers over millions of consumers, but would make the U.S. worse off, not better off, on net.

4. Finally, instead of complaining, we should be thankful for China's foreign aid to Americans through an undervalued currency, overvalued dollar, and undervalued goods that save Americans billions of dollars every year.

Update: If you wouldn't object to China sending products to the U.S. for free, then on what basis would you object to currency manipulation that allows you to purchase undervalued Chinese imports at a huge discount and great bargain?  

70 Comments:

At 11/01/2011 9:13 PM, Blogger Benjamin said...

Interesting post.

Add on, we can just print money, and evidently foreigners accept this as payment for their goods and services.

In other words, when we print money and buy foreign goods, they are free (except for the cost of printing Treasury bills or money).

Of course, this reality absolutely crushes the "supply side" arguments to boost our economy. The supply side has become global and thus vastly cheaper, better and less-bottlenecked than 30 years ago. Who can deny that?

What we need in the USA is a lot more demand. If you want to grow the USA economy, you should print gobs of more money.

The global supply chain supplies the demand, kills inflation, while the new demand boost GDP. And we have much higher living standards.

The peevish small-minded right-wingers are against American prosperity, but I am ready for boomtimes.

 
At 11/01/2011 9:18 PM, Blogger StockManiac2008 said...


we should be thankful for China's foreign aid to Americans through an undervalued currency, overvalued dollar, and undervalued goods that save Americans billions of dollars every year.

Well, we have lost Millions of jobs because of this. What do you have to say for that?
What is point of living on minimum wage or on unemployment checks and shop at Walmart? America wasn't like that 20 years ago. The Billions of dollars saved goes directly into the pockets of the so called 1%.

 
At 11/01/2011 9:31 PM, Blogger Mark J. Perry said...

Much of the hundreds of billions of dollars saved by buying Chinese products have been spent on American goods and services, supporting millions of U.S. jobs. We see many of the jobs lost from buying Chinese products, but we don't see many of the jobs gained or supported from the dollars saved and spent on American goods and services.

 
At 11/01/2011 9:31 PM, Blogger Buddy R Pacifico said...

"I would argue that forcing China to appreciate its currency would be equivalent to a protectionist tariff on Chinese goods,..."

Hmm, some hyperbole at work here but

is it not the central point that there is not a foreign exchange market for the yuan?

If markets are great then a market for the yuan is in the sphere of greatness.

A great leap forward will be when dollars can be exchanged for yuan in China, at market price and not PRC stated price.

Markets in everything? No, not the yuan, yet, if ever.

Since when, is a market protectionist tariff barrier?

 
At 11/01/2011 9:36 PM, Blogger Mark J. Perry said...

A gift, or foreign aid, from China to the U.S, in the form of an undervalued currency might be better for us on net than a market-determined yuan.

Gifts in Everything: An Undervalued Yuan.

 
At 11/01/2011 10:01 PM, Blogger Bret said...

An interesting counterpoint is "[t]he Kenyan economics expert James Shikwati, 35, says that aid to Africa does more harm than good." The article is titled "For God's Sake, Please Stop the Aid!" so he feels very strongly about this. The basic gist is that corruption is exacerbated by aid.

Was he just wildly wrong? If not, why would this Chinese aid to the U.S. be any better? Americans seem very, very corruptible these days, especially politicians.

 
At 11/01/2011 10:10 PM, Blogger Buddy R Pacifico said...

Markets in Everything > Gifts in Everything. :>)

 
At 11/01/2011 10:23 PM, Blogger W.C. Varones said...

Aren't you ignoring the fact that this encourages excess consumption at all levels from the consumer to the federal government?

Is the underwater consumer not a problem in your view? 100% debt/GDP?

I'd rather have less debt and less cheap Chines crap.

 
At 11/01/2011 10:54 PM, Blogger StockManiac2008 said...


We see many of the jobs lost from buying Chinese products, but we don't see many of the jobs gained or supported from the dollars saved and spent on American goods and services.

There are more than 25Million unemployed or under employed in the country, that's why DON'T see the small number of jobs gained by the dollar saved. As I said before, working in a mall and eating in McDonald and shopping at Walmart is not America.
For you economist with your tenured jobs, it is all just numbers and graphs. You don't care...

 
At 11/02/2011 1:47 AM, Blogger Ron H. said...

Bret: "An interesting counterpoint is "[t]he Kenyan economics expert James Shikwati, 35, says that aid to Africa does more harm than good." The article is titled "For God's Sake, Please Stop the Aid!" so he feels very strongly about this. The basic gist is that corruption is exacerbated by aid."

Zambian economist Dambisa Moyo would agree that aid should be stopped. It helps keep corrupt tyrants in power, and helps keep underdeveloped economies from growing.

Aid to underdeveloped countries is often distributed centrally, giving corrupt government officials control over it.

In the US, individual consumers can benefit from buying goods they want at lower prices. Not at all the same, unless you believe that spending less is a corrupting influence.

 
At 11/02/2011 1:57 AM, Blogger Ron H. said...

W. C. :"Aren't you ignoring the fact that this encourages excess consumption at all levels from the consumer to the federal government?

Is the underwater consumer not a problem in your view? 100% debt/GDP?
"

I don't see the connection you are trying to make between low prices and debt.

Are you suggesting that government should force consumers to spend more for things they use in order to protect them from their uncontrollable urges to borrow?

It's even harder to connect low prices to government debt. he fact that buyers are available for government debt doesn't mean it should be issued without regard to consequences.

 
At 11/02/2011 2:03 AM, Blogger Ron H. said...

Stock: "There are more than 25Million unemployed or under employed in the country..."

Do you think they wish they had jobs assembling cheap plastic crap to be sold at Walmart?

"...that's why DON'T see the small number of jobs gained by the dollar saved. As I said before, working in a mall and eating in McDonald and shopping at Walmart is not America. "

But if I can buy Chinese goods cheaper, I can spend the money I save at the mall, so you will continue to have your job.

 
At 11/02/2011 3:18 AM, Blogger Jason said...

Texas is artificially keeping its cost of living low in order to keep the costs of products produced in Texas to be sold in California artificially low.

What California needs is the United States government to step in and equalize the cost of living between Texas and California so that Texas will stop flooding the California market with cheap plastic crap.

 
At 11/02/2011 6:16 AM, Blogger juandos said...

"Well, we have lost Millions of jobs because of this. What do you have to say for that?"...

I'm willing to bet that federal government interference in the economics sector has killed off and will continue to kill off more jobs in the US than the Chinese ever could...

 
At 11/02/2011 6:21 AM, Blogger juandos said...

Congressional Democrats attempt to kill off more domestic employment

 
At 11/02/2011 6:23 AM, Blogger juandos said...

bret and Ron H, thanks for the links....

Good stuff!

 
At 11/02/2011 6:51 AM, Blogger Don Culo said...

"Congressional Democrats attempt to kill off more domestic employment"

************

Did we have an employment boom and economic boom in 2008 when we had a republian president and congress?

 
At 11/02/2011 7:15 AM, Blogger juandos said...

"Did we have an employment boom and economic boom in 2008 when we had a republian president and congress?"...

Hmmm, well don culo we did NOT have a Republican Congress in 2008...

Unemployment and under employment in fact spiked sharply upwards while the Democrats had control over both houses of Congress...

 
At 11/02/2011 7:56 AM, Blogger VangelV said...

This topic is another joke. The Federal Reserve and Treasury are manipulating the interest rates and meddling in the futures market to influence the dollar on a continuing basis. That means that no matter what the effect of the Chinese peg the US is in no position to call anyone else who uses a fiat money system a currency manipulator. This is exactly why we need something like the Classical Gold Standard and take the forex manipulators out of the system.

 
At 11/02/2011 7:57 AM, Blogger VangelV said...

Add on, we can just print money, and evidently foreigners accept this as payment for their goods and services.

This is true of all fiat money systems. Which is why they are coming to an end.

 
At 11/02/2011 8:29 AM, Blogger W.C. Varones said...

Ron H.,

Trade deficits mean we are consuming more than we produce.

And trade deficits are positively correlated with government budget deficits, the "twin deficits" phenomenon.

 
At 11/02/2011 8:38 AM, Blogger Dharm said...

This is one way of looking at the situation; on the other hand to buy these cheap chines products Americans should earn enough. I did not get where from the money will come to American consumers!! There has to be a balance. Who ever manufacture goods, some one has to consume, buying power is most important, that is employment, it could be in manufacturing sector, service or innovation!
Also I do not mean that everything should be manufactured here in US; for example; Steve Jobs has made fortune, though I Phones and I Pads are made in China!
It is really debatable, there has to be a balanced trade agreements!
to draw a line between advantages and disadvantages!!!

 
At 11/02/2011 8:45 AM, Blogger Sean said...

China paying us for jobs that feel like jobs "just doesn't feel right".

 
At 11/02/2011 10:19 AM, Blogger sethstorm said...


China Manipulates Its Currency To the Advantage of U.S. Consumers and Businesses Buying Its Products


Only if you don't care about the consequences of eating your seed corn. You might have something to eat now, but you're not going to have anything to grow with later.

Same thing applies with China. Bring the tariffs back, the US will adapt and grow when the unemployed return to work created by the lack of a Third World threat.

 
At 11/02/2011 10:36 AM, Blogger juandos said...

"Same thing applies with China. Bring the tariffs back, the US will adapt and grow when the unemployed return to work created by the lack of a Third World threat"...

Really?!?! According to whom?

How do you dream this stuff up sethstorm?

 
At 11/02/2011 10:42 AM, Blogger Sigli said...

Dr. Perry,

Your comments never include an analysis of broadening the tax base and increasing velocity through "buy American". Wouldn't there be a lower welfare cost and thus a benefit to consumers from a multiplier effect once traction gains? Call it a charity dividend.

I'm all for the Fed printing money until everyone and anyone hoarding US Treasuries gets fed up and starts consuming US goods instead, but that only means this generous "Chinese" gift comes to an end. I quoted Chinese because it may as well go for all hoarders of USD.

All input will be appreciated. I'm interested in scholarly work more than anything. Thanks.

 
At 11/02/2011 11:03 AM, Blogger Paul said...

Benji,

"What we need in the USA is a lot more demand. If you want to grow the USA economy, you should print gobs of more money.

Yeah, it's just that easy...So once again I ask you why is there still any poverty on the planet? Any idiot can max out the printing presses.

 
At 11/02/2011 1:31 PM, Blogger Jet Beagle said...

This comment has been removed by the author.

 
At 11/02/2011 1:33 PM, Blogger Jet Beagle said...

dharm: "It is really debatable, there has to be a balanced trade agreements!"

Here's the way the world works for one person:

1. I provide services to my employer and he pays me the cash and benefits we have both agreed upon.

2. I give some of the cash I received to Walmart and Walmart give me socks and golf balls.

3. Walmart gives my money to Chinese manufacturers in exchange for more socks and golf balls.

4. The Chinese manufacturer does whatever he want to do with the cash Walmart gave him.

What is not balanced, dharm? Each transaction involved an exchange which made both parties better off. Why does anyone have a right to interfere with those transactions?

 
At 11/02/2011 1:39 PM, Blogger VangelV said...

Bring the tariffs back, the US will adapt and grow when the unemployed return to work created by the lack of a Third World threat.

You are forgetting the capital. How does the US adopt and grow when it has no savings? Don't you understand that when the party ends the US will have to pay for things that it buys with hard money rather than fiat paper? This is the problem being missed by the protectionists and by the optimists.

 
At 11/02/2011 1:43 PM, Blogger VangelV said...

Your comments never include an analysis of broadening the tax base and increasing velocity through "buy American". Wouldn't there be a lower welfare cost and thus a benefit to consumers from a multiplier effect once traction gains? Call it a charity dividend.

Hell, no. When prices rise people will be able to afford fewer goods and services and many more will wind up on the welfare rolls. China has nothing to do with the employment problems in the US. Those are caused by Congress, the Treasury, and the Fed.

I'm all for the Fed printing money until everyone and anyone hoarding US Treasuries gets fed up and starts consuming US goods instead, but that only means this generous "Chinese" gift comes to an end. I quoted Chinese because it may as well go for all hoarders of USD.

You need to look at monetary history. When the USD loses its purchasing power the middle class gets wiped out. How does that help?

 
At 11/02/2011 2:37 PM, Blogger DadIsInTheHouse said...

Let me know when China imports a pragmatic street-legal automobile that gets 60+ MPG (or other energy equivalent) and sells for less than 10k and can be purchased directly online or Walmart.

Whoever creates this will be a ka-billionaire.

 
At 11/02/2011 3:04 PM, Blogger rjs said...

it pains me to say it, but mark's logic is impeccable this time, & i agree with his analysis in this post...

i just wonder what the end game is; after all, they are holding around $3 trillion in foreign reserves, & their assets are as sound as the dollar...

 
At 11/02/2011 3:25 PM, Blogger Jet Beagle said...

rjs: "after all, they are holding around $3 trillion in foreign reserves"

Not sure what other foreign reserves the Chinese hold, but their U.S. Treasuries holdings are far less than $3 trillion:

China's Holdings of U.S. Treasuries

Aug-2010 .... $1.137 trillion
Aug-2011 .... $1.137 trillion

Uh, that's an annual increase of .... $0.

 
At 11/02/2011 3:31 PM, Blogger Jet Beagle said...

Oh, forgot to note. If we combine the U.S. Treasuries holdings of China and Hong Kong:

Aug-2010 .... $1.270 trillion
Aug-2011 .... $1.235 trillion

we see that the total People's Republic of China has actually reduced its holdings of U.S. Treasuries.

 
At 11/02/2011 3:52 PM, Blogger VangelV said...

i just wonder what the end game is; after all, they are holding around $3 trillion in foreign reserves, & their assets are as sound as the dollar...

Actually, the Chinese have picked up companies that hold a great deal of USD denominated debt and have borrowed in USD to pay for a great deal of infrastructure. When the USD is wiped out the debs will go away but the assets will still be there.

 
At 11/02/2011 3:55 PM, Blogger Ron H. said...

W. C.: "Trade deficits mean we are consuming more than we produce."

Correct, and attracting equivalent amounts of foreign capital, for a net zero balance of payments.

"And trade deficits are positively correlated with government budget deficits, the "twin deficits" phenomenon."

The fact that too much of that foreign capital buys government debt is unfortunate, but *should be* within our control. that it isn't well controlled, is not a reason to call for higher prices for consumers, and a reduction in foreign investment in productive enterprises and jobs in the US.

 
At 11/02/2011 4:04 PM, Blogger Ron H. said...

Jet: "4. The Chinese manufacturer does whatever he want to do with the cash Walmart gave him."

...Which, being in US$, must be eventually returned as spending or investment in the US, unless the Chinese manufacturer doesn't mind providing free socks & golf balls.

 
At 11/02/2011 4:09 PM, Blogger Jet Beagle said...

W.C. Varones: "Trade deficits mean we are consuming more than we produce."

Trade deficits are an INDICATOR that a nation is consuming more than it produces. But trade is not what causes that situation. If a negative savings rate is a problem, inhibiting trade is not a solution for that problem.

Actually, there is nothing inherently wrong with consuming more than one produces. That's true at the individual level and at the national level. If today's consumption increases tomorrow's output - in other words, productive investment - such consumption should increase overall production and enable increased future consumption.

 
At 11/02/2011 4:10 PM, Blogger Jet Beagle said...

Ron H: "Which, being in US$, must be eventually returned as spending or investment in the US"

Exactly!

 
At 11/02/2011 5:53 PM, Blogger Sandy said...

Completely ignores the balance of payment issue. Author's point is correct if U.S. were to keep its overseas selling in balance with its buying over some period of time. This could be done by limiting imports (take last quarters export dollar value and limit next quarters imports to that dollar amount) or really marketing and selling American products overseas. With a balanced trade account author is correct.

 
At 11/02/2011 6:01 PM, Blogger OBloodyHell said...

>> I'd rather have less debt and less cheap Chines crap.

Apparently, the American consumer disagrees with you.

Who the eph are you, and why should YOU get to define policy?

Just askin'...

 
At 11/02/2011 6:03 PM, Blogger OBloodyHell said...

>>> Do you think they wish they had jobs assembling cheap plastic crap to be sold at Walmart?

Yes. Yes He Does.

>>> I'm willing to bet that...

Juandos, ding ding ding!. +1

 
At 11/02/2011 6:17 PM, Blogger OBloodyHell said...

>>> Hmmm, well don culo we did NOT have a Republican Congress in 2008...

Hey, don't confuse the point with FACTS, man!! He's got an axe to grind, and here you are trying to blunt it!

>>> Unemployment and under employment in fact spiked sharply upwards while the Democrats had control over both houses of Congress...

While I would suspect a measure of cause-and-effect, I'm also intellectually honest enough to think that the GOP would have fared little better.

I believe the key cause of the problem by that point was the worsening Housing Bubble, however, which I personally break down as
65% Democrats
25% Republicans
10% Greedy Bankers
5% Greedy Homebuyers

The Dems get the most of that because they were in charge not of Congress but key positions on Senate and House committees in charge of dealing with it, and vehemently opposed efforts to "head the problem off at the pass"

A search on "barney frank housing bubble video GSEs" will show you some key footage that more than amply makes the case for the above, with BF extolling "I'd like to roll the dice a little more." and a number of other key Dems claiming that there was not a thing wrong with the GSEs in committees brought by GOP executive-branch appointees to the contrary.

 
At 11/02/2011 6:27 PM, Blogger OBloodyHell said...

>>> Same thing applies with China. Bring the tariffs back, the US will adapt and grow when the unemployed return to work created by the lack of a Third World threat.

Sethstorm with his typically retarded and ignorant analysis...

There is little to no money to be made in manufacturing. There are next to no jobs to be had in manufacturing brought home.

For over a century, the Ag worker was the mainstay of US production. With the advent of mechanized farming, those workers were freed up from those jobs, and made available for manufacturing jobs.

The net result was, by around 1920, that the Ag workers of the USA were down to 5-10% of workers, even as food production went through the roof for the most of the following time period. Since then the Ag workers have drifted steadily down to the current minimum of about 2-4% of total workforce.

Robotics is doing the exact same thing in Industry that mechanization did to Ag. It is in the process of reducing our workforce in manufacturing to 5-10%, with the long term trend to reduce it to that same 2-4% of total workforce that Ag workers represent.

We are the world's first, and so far only, IP & Services economy. All future wealth of note is going to come from this sector, as we create new and more varied IP and Services to sell.

Stop wasting time and effort caterwauling about manufacturing jobs, and start demanding a relaxation of and reduction in government mandated business compliance folderol, which costs a huge number of potential jobs each and every year.

 
At 11/02/2011 6:37 PM, Blogger OBloodyHell said...

>>> This could be done by limiting imports (take last quarters export dollar value and limit next quarters imports to that dollar amount) or really marketing and selling American products overseas.

Yes, by all means, let's start down the exact same protectionist road that the Smoot-Hawley Tariff Act started us on.

It'll be loads of fun!

Brilliant!

Such Genius!

/sarcasm off
/sneer off


Clue 1:
The Nation That Lost Its Jobs, But Got Them Back

Clue 2:
Comparative advantage

 
At 11/02/2011 8:10 PM, Blogger juandos said...

"While I would suspect a measure of cause-and-effect, I'm also intellectually honest enough to think that the GOP would have fared little better"...

Yeah OBH you caught me amigo...:-)

Part of those job losses can be laid at the feet of Congressional legislation and regulation, a big part in fact...

Still coincidence did help a lot...:-)

Check out the following: STOSSEL: Our Government Doesn't Create Jobs, It Kills Them

 
At 11/02/2011 8:24 PM, Blogger Ron H. said...

Sandy: "Completely ignores the balance of payment issue."

The balance of payments by definition, must be 0. If there is a trade deficit, there is a corresponding capital account surplus.

"Author's point is correct if U.S. were to keep its overseas selling in balance with its buying over some period of time. This could be done by limiting imports (take last quarters export dollar value and limit next quarters imports to that dollar amount) or really marketing and selling American products overseas.

There is no need for imports and exports to balance. As explained above, capital account surplus balances current account deficit. As imports are paid for in US$, they must eventually be redeemed in the US or goods, services, or assets, or else the imported goods are free.

Limiting imports means higher prices for consumers, causing a net loss in standard of living.

 
At 11/02/2011 8:57 PM, Blogger VangelV said...

While I would suspect a measure of cause-and-effect, I'm also intellectually honest enough to think that the GOP would have fared little better.

There is little difference between the Democrats and Republicans. Both parties are very corrupt and are strongly supportive of a growing state. This is why only two of the current slate of presidential candidates have actually put forward budgets that would cut real spending and balance the budgets.

The Dems get the most of that because they were in charge not of Congress but key positions on Senate and House committees in charge of dealing with it, and vehemently opposed efforts to "head the problem off at the pass"

I disagree. Both parties supported the Fed's constant meddling in the economy and the prevention of a market liquidation of investment. Both parties were pushing Fannie and Freddie to expand home ownership. Both parties forgot that credit is not something that is given to you but something that you already have due to your character.

A search on "barney frank housing bubble video GSEs" will show you some key footage that more than amply makes the case for the above, with BF extolling "I'd like to roll the dice a little more." and a number of other key Dems claiming that there was not a thing wrong with the GSEs in committees brought by GOP executive-branch appointees to the contrary.

This is very true. But it was also the Republicans that opposed Ron Paul's proposal to remove the GSE's implicit guarantee. Without that implied guarantee the Basel treatment of GSE paper would have been different and the securitization would not have gotten as out of hand as much it did.

When doing this analysis we have to dig down a bit below the surface. Both parties are corrupt and to blame.

 
At 11/03/2011 6:38 AM, OpenID Sprewell said...

While most of what Mark says is undeniably true, I have to agree with Buddy, for once, ;) about a bit of hyperbole that snuck in to Mark's post. Calling a forced increase in Chinese valuation equivalent to a tariff is just ridiculous. The Chinese govt is purposely devaluing their currency and in the process most likely hurting the Chinese. While this definitely helps us in the US in the short-run, we'd all be better off in the long-run if the Chinese govt got the fuck out of these markets and let the market handle these matters. I don't think our govt should do anything about it, because I don't trust these retards in charge over here to do it without threatening tariffs or something similarly dumb, but the fact remains that the Chinese govt needs to get out of the currency market.

 
At 11/03/2011 8:20 AM, Blogger Sigli said...

VangelV said "Hell, no. When prices rise people will be able to afford fewer goods and services and many more will wind up on the welfare rolls. China has nothing to do with the employment problems in the US. Those are caused by Congress, the Treasury, and the Fed."

Sorry bud, but the same zero sum argument Dr. Perry applied earlier applies here. Every exchange has a counterpart, so let's not pretend both sides of the equation are only there when it suits us.

You failed to understand the question I posted. Also, I specifically asked for something scholarly and not your rants.

VangelV said You need to look at monetary history. When the USD loses its purchasing power the middle class gets wiped out. How does that help?

I generally disregard the "you need to look" jingoists, but one question comes to mind: What about M x V is so hard for pseudo-Austrians to understand?

 
At 11/03/2011 8:56 AM, Blogger VangelV said...

The Chinese govt is purposely devaluing their currency and in the process most likely hurting the Chinese. While this definitely helps us in the US in the short-run, we'd all be better off in the long-run if the Chinese govt got the fuck out of these markets and let the market handle these matters.

But all governments, including the US, manipulate their fiat currencies. Why go after the Chinese when the UK, EU, India, Brazil, Switzerland, etc., all play the same game as the US does?

 
At 11/03/2011 9:03 AM, Blogger VangelV said...

Sorry bud, but the same zero sum argument Dr. Perry applied earlier applies here. Every exchange has a counterpart, so let's not pretend both sides of the equation are only there when it suits us.

Sorry 'bud' but you are not only ignorant of economics but you are confused. What harm is done when I exchange my money, which I value less, for the TV that I purchase from a Korean manufacturer that imports parts from around the world and assembles that TV in China? I obviously want the TV more than the money. So how do I lose? And if I don't lose why should I worry about if the other side is as happy with the transaction as I am?

You failed to understand the question I posted. Also, I specifically asked for something scholarly and not your rants.

If you want to understand try doing some actual reading and get an education. You can start with the idea that all market transactions are voluntary. I do not lose if someone gives me a discount. And nobody wins by keep giving discounts and losing money. That suggests that your premise is screwed up.

I generally disregard the "you need to look" jingoists, but one question comes to mind: What about M x V is so hard for pseudo-Austrians to understand?

Nothing. We understand that V is not an independent variable and that the other terms in the equation are not really easy to determine. You obviously have not thought much about the subject and are not aware what happens when governments resort to printing presses and devaluation. Try reading.

 
At 11/03/2011 12:02 PM, OpenID Sprewell said...

Vange, first off, the US govt doesn't "manipulate" the currency, the Fed does and the Fed is largely a private institution, rendering it independent of govt control just like the central banks of many of the other regions you list. And while the Chinese are systematically devaluing their currency to keep export prices down, the Fed only steps in to keep inflation within a predictable band, with the valuation against other currencies not much of a concern. In fact, despite all the complaints about recent Fed moves possibly devaluing the dollar, the dollar has actually strengthened during this recession. So while some other countries may interfere a bit, nobody is doing it as systematically as the Chinese are nor for as nefarious reasons as they are, to keep political control by avoiding quick run-ups and the resulting crashes that might be politically destabilizing for their govt.

 
At 11/03/2011 2:17 PM, Blogger Sigli said...

Maybe a respectable poster can answer my inquiries.

Morganovich? Juandos?

 
At 11/03/2011 2:23 PM, Blogger Ron H. said...

Sigli: "You failed to understand the question I posted. Also, I specifically asked for something scholarly and not your rants."

You may not realize that you are commenting on a blog that's open to everyone. Other that Prof. Perry, I'm not sure there are any scholars posting here. If It's scholarly you want, you can probably find something as easily as anyone else here, or you might want to try some other blog where really smart people like yourself hang out.

 
At 11/03/2011 4:59 PM, Blogger Ron H. said...

Sprewell: "So while some other countries may interfere a bit, nobody is doing it as systematically as the Chinese are nor for as nefarious reasons as they are, to keep political control by avoiding quick run-ups and the resulting crashes that might be politically destabilizing for their govt."

I'm not sure we should care why China manipulates it's currency. The effect is to give US consumers lower prices. The fact that the Chinese policy hurts the Chinese people, shouldn't keep us from buying at the lower prices.

If I owned a gas station, and was selling gas for $1/gal, I suspect you might get in line with those several other people, and fill your tank. I'm not sure you'd care that my employees work for $2/hr, or that my competitor on the other corner, can't stay in business at any price less that $3/gal.

 
At 11/03/2011 5:20 PM, Blogger VangelV said...

Vange, first off, the US govt doesn't "manipulate" the currency, the Fed does and the Fed is largely a private institution, rendering it independent of govt control just like the central banks of many of the other regions you list.

No, it is not a 'private institution.' Clearly the profits it helps its members to make a great deal of money as they transfer wealth from workers, savers, and investors to themselves. But they would not be allowed to do so unless they did what governments want; create inflation that allows politicians to buy votes without direct payment as would be required in a hard money system.

And while the Chinese are systematically devaluing their currency to keep export prices down, the Fed only steps in to keep inflation within a predictable band, with the valuation against other currencies not much of a concern.

Wrong. They have set a peg which allows the currency to gain value over the USD slowly while the Fed and Treasury are doing their best to destroy the purchasing power of the USD.

In fact, despite all the complaints about recent Fed moves possibly devaluing the dollar, the dollar has actually strengthened during this recession.

Not really. The index has gone up because the Euro is collapsing and there is a flight to illusory safety by funds and financial institutions. What has been missed is the increase in the price of gold and silver and the move up in agricultural commodities and energy.

So while some other countries may interfere a bit, nobody is doing it as systematically as the Chinese are nor for as nefarious reasons as they are, to keep political control by avoiding quick run-ups and the resulting crashes that might be politically destabilizing for their govt.

As I pointed out, they have a peg. Hong Kong and Singapore have used pegs. The Swiss have pegged their currency to the Euro. The EC$ and the Bahamian dollar are pegged to the USD. There are more than 50 other currencies that are also pegged to other currencies.

 
At 11/04/2011 1:34 AM, OpenID Sprewell said...

Ron, not only should we care why China manipulates but we should be against their doing it. Suppose the Chinese were employing widespread prison labor and working their prisoners, who might simply be members of a religion like Falun Gong, to death. Would you still say the "fact that the Chinese policy hurts the Chinese people, shouldn't keep us from buying at the lower prices" from such hypothetical prison labor and deaths? I suspect not. Now of course, like you, I don't want the US govt to make that decision for me, but I certainly think most people wouldn't want to buy products produced in such a way. Your gas station example is irrelevant because that is completely the result of voluntary transactions, which is not the case in China. I'm not of the Buddy camp that argues this currency issue for duplicitous reasons, because his camp really wants to eliminate Chinese competition and could care less what goes on over there. I'm saying that, without any US govt involvement, we need to vote with our wallets, which you could choose not to take part in, and realize that a loss of freedom anywhere, including China, could be to all of our detriment over the long run.

Vange, it is well-known that the Fed is primarily a private institution, that takes in private money from its member banks and chooses how to lend it back in crises. Seigniorage through inflation is a tiny amount every year, trust me, the govt could give a shit about that when they are already raping the taxpayer for trillions. I think you misunderstand the notion of a currency "peg," which would mean they are actively intervening in currency markets so that the exchange ratio stays the same over time. If you actually look at the data, you'll see that any such peg lasts for a year or two at most, as the Yuan eventually appreciates, though it would no doubt appreciate even more if the Chinese didn't intervene. You seem to attribute the appreciation of the Yuan to the Fed and Treasury "destroying" the Dollar, but it's funny how the US has actually appreciated against practically every other currency during that same timespan, so the evidence is against you there.

"Not really?" The Dollar hasn't gone up against practically every other currency? Oh, I see, the "index has gone up," so you agree the Dollar has gone up and your "not really" is nonsensical. For what it's worth, I agree with you that the USD is merely the tallest pygmy among currencies, ie it's merely the least bad of a sucky bunch. But your notions of rampant devaluation are certainly not borne out either. As for gold and silver, do you think that metals bubble will hold up when the next economic boom begins? Your beloved commodities are going to collapse in such a scenario, when people stop rushing to their "illusory safety" also. You claim that the Swiss franc is pegged to the Euro, doesn't seem like a peg to me. I think you are confused about who is actually pegging, ie artifically setting a fixed exchange rate.

 
At 11/04/2011 1:43 AM, OpenID Sprewell said...

Hmm, turns out you are right about the Swiss Franc-Euro peg, which was just announced last month, which is why it doesn't show up in the data yet. I don't really follow currency markets, so I wasn't aware of this new reversal, but in any case, it is a bit silly to compare a one-month peg to what China has been doing for decades.

 
At 11/04/2011 5:39 PM, Blogger Ron H. said...

Sprewell: "Suppose the Chinese were employing widespread prison labor and working their prisoners, who might simply be members of a religion like Falun Gong, to death. Would you still say the "fact that the Chinese policy hurts the Chinese people, shouldn't keep us from buying at the lower prices" from such hypothetical prison labor and deaths?"

We have moved from Chinese pegging their currency to torturing and killing slave laborers. :) You are absolutely correct that we can each make individual choices and vote with our dollars in whatever way, and for whatever reasons we wish. That is the very essence of a free market.

The more common complaint is that currency manipulation by the Chinese causes us to buy things too cheaply, which makes no sense. Most of us shop for the lowest prices we can find, and if they happen to be in China, then so be it.

Those who complain about lost US jobs, are also free to spend their dollars wherever they please, and pay more for things if they wish.

My objection is to the calls for government action, often tariffs, as a coutnermeasure to Chinese low priced imports.

 
At 11/04/2011 6:03 PM, OpenID Sprewell said...

Ron, hey, you made the gas station analogy, I was free to counter with my own analogy. :) My analogy was extreme for a reason, to show that your logic doesn't always hold, and was stated to be hypothetical, though the Chinese are in fact doing exactly that to some smaller extent. I already agreed that Chinese currency manipulation is a benefit for the US consumer, at least in the short-run, and that US jobs are not my concern, because US consumers do benefit. We both certainly don't want tariffs, which is where guys like Buddy usually go next. But I don't care for the hyperbole from Mark that the Chinese simply getting out of manipulating their currency would itself be a protective tariff. And I think very soon, people will have all this info available to them on their smartphone, so they can easily and actively choose not to buy any goods that they morally object to, whether the result of Chinese prison labor or because they don't think the Chinese get paid enough or because of child labor.

 
At 11/04/2011 9:52 PM, Blogger Ron H. said...

Sprewell: "But I don't care for the hyperbole from Mark that the Chinese simply getting out of manipulating their currency would itself be a protective tariff."

I think the original post equates the effect of a higher yuan which would raise prices of US imports, with the effect of a tariff, which would also raise prices. Higher prices are higher prices.

"And I think very soon, people will have all this info available to them on their smartphone, so they can easily and actively choose not to buy any goods that they morally object to, whether the result of Chinese prison labor or because they don't think the Chinese get paid enough or because of child labor."

Free choice is great, ain't it?

 
At 11/04/2011 10:27 PM, OpenID Sprewell said...

Ron, higher prices are higher prices but the reason matters, as I pointed out with the prison labor example. We should want the Chinese to stop interfering in their currency market, whether it helps US consumers in the short-run or not. I certainly see no reason for the US govt to get involved, but that doesn't stop consumers from voting with their feet.

 
At 11/04/2011 11:49 PM, Blogger Ron H. said...

Sprewell: "Ron, higher prices are higher prices but the reason matters, as I pointed out with the prison labor example. We should want the Chinese to stop interfering in their currency market, whether it helps US consumers in the short-run or not. I certainly see no reason for the US govt to get involved, but that doesn't stop consumers from voting with their feet."

Good luck convincing people they shouldn't shop at Walmart.

 
At 11/05/2011 3:39 PM, Blogger naurui said...

What I think is that higher price of American products come from several sources but dominantly from the fact that their profit are the basis of the luxurious lifestyle of the upper 1%. So these prices which slowed American economy are buil...t in the super houses and cars of the elite. A cutely designed progressive property tax could get this back and invest it in the support of the small entrepreneurs. At the same time the USA should realize that WTO is not necessarily good for them. The American government began this when they tried to exchange the dollar/yuan rate recently. China cited WTO in response... Although this was still lighter than a plus tax on Chinese import...

 
At 11/05/2011 4:54 PM, Blogger naurui said...

Many economists are worried about the next few years of the world economy and the same worry seems to be expressed by investors in the high prices of gold. This worry comes mainly from the poor production of the American economy in the last years and of the enourmous debt of the USA. These two factors could be the reason why the S and P devalued the USA recently as not being an "AAA" country any more. The USA debt comes from the fact that consumption has been higher than production for quite a period.

So American production is too low. And why? Because American investors put their money too much in China and other countries in stead of the USA. As the American national debt / GDP rate grows the trust in American shares, bonds and T-bills will fall. And also the trust in American banks will fall.

So buying Chinese products in stead of American products increases the American national dept / GDP rate and this will undermine the American fiscal system as well as the government's budget.

 
At 11/06/2011 11:20 AM, Blogger VangelV said...

Hmm, turns out you are right about the Swiss Franc-Euro peg, which was just announced last month, which is why it doesn't show up in the data yet. I don't really follow currency markets, so I wasn't aware of this new reversal, but in any case, it is a bit silly to compare a one-month peg to what China has been doing for decades.

I don't see how quoting a clueless idiot helps your argument. Or what your argument really is this time. If you are trying to show that other countries use pegs your reference is very helpful but it does not deal with why it is good for the Swiss to do what is supposedly not allowed for the Chinese. But I hardly think that you want to base your argument, whatever it may be evolving into, on the analysis of another fool who does not understand what he is looking at the markets. The fact that we have a mixture of low yield bonds and defensive stocks being recommended shows us exactly how poor the thinking is. Both are likely to get killed in real terms if there is any inflation. And while gold would help in a period of money printing, the analyst argues against it.

I think that you are painting yourself into a corner. There is little justification for your anti-market position and with each iteration you are finding yourself further and further away from a salvageable argument.

 
At 11/06/2011 11:26 PM, OpenID Sprewell said...

Vange, as usual, you need to learn how to read. I only linked to that "clueless idiot" to back up your point that the Swiss Franc switched to a Euro peg a month ago, so if you think he's worthless, you are damaging your own point. :) His argument that gold is in for a plateau, which I did not reference, is irrelevant to me, since I called a collapse, much worse than his leveling off prediction. Obviously a peg is bad for the Swiss too, but I already pointed out that it's silly to compare a one-month peg to what China has doing for decades. Funny how you run away from my arguments to instead try and attack the guy I linked, who was only linked as factual support for your Swiss Franc claim. XD Haha, who's taking the anti-market position here: you, who says it's okay if all these countries use pegs for their fiat currencies, or me, who's saying they should let the market decide what the true worth of their currency is? You seem confused about even the basics, which is why I'm not sure you even understand what "a salvageable argument" is.

 
At 11/07/2011 1:55 PM, Blogger VangelV said...

Vange, as usual, you need to learn how to read. I only linked to that "clueless idiot" to back up your point that the Swiss Franc switched to a Euro peg a month ago, so if you think he's worthless, you are damaging your own point. :)

First,thank you for agreeing that other countries peg their currencies. But this is just a known fact as is the fact that there are more than 50 countries that peg their currencies to other currencies.

His argument that gold is in for a plateau, which I did not reference, is irrelevant to me, since I called a collapse, much worse than his leveling off prediction.

The analysis, like yours is clueless. The same factors that have driven gold higher are in play today. If the Euro collapses we will see much higher prices for gold. Permabears like you have no clue about monetary theory, which is how you missed the fact that since Nixon closed the gold window, the US has been one of the world's biggest currency manipulators of all time.

Obviously a peg is bad for the Swiss too, but I already pointed out that it's silly to compare a one-month peg to what China has doing for decades.

No it is not. A peg is a peg and the principle is exactly the same. Funny how I never heard much from idiots like you when China used the peg to allow its currency to rise against that of its neighbours. Had it abandoned the peg the Asian Flu would have taken the RMB to the 10 -12 to 1 exchange.

Funny how you run away from my arguments to instead try and attack the guy I linked, who was only linked as factual support for your Swiss Franc claim.

I do not run away from an argument. As I said, it supported my claim against yours.

XD Haha, who's taking the anti-market position here: you, who says it's okay if all these countries use pegs for their fiat currencies, or me, who's saying they should let the market decide what the true worth of their currency is? You seem confused about even the basics, which is why I'm not sure you even understand what "a salvageable argument" is.

I have no problem with fixed exchange standards when we are talking about a hard money system because it does not matter how many grains of gold or silver a particular currency is backed up by. All that such an arrangement does is get rid of forex speculation. The problem is the use of fiat money, which is clearly anti-market. As I pointed out, as long as the US uses fiat money it is in no position to accuse anyone of playing games with exchange rates.

 

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