Anyone reading this site knows we have talked in depth about China's currency manipulation. Now Paul Krugman takes it on, which is good news due to the devastating impact currency manipulation has on the U.S. economy, especially jobs and manufacturing.
Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion.
Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.
And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.
Krugman then takes on the entire public justification for doing nothing, which is good old fashioned fear.
What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.
It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.
Krugman also says we must play hardball and impose an import surcharge until China re-evaluates or floats it's currency.
Krugman just said the T word, tariffs, imposed across the board on China. I never thought I'd see the day Krugman would recommend action involving tariffs to save my soul, but this shows you how serious Chinese currency manipulation is.
Way to go Krugman!
Below is a clip from a conference on China Currency manipulation with Krugman:
For those not of the faint of heart, Krugman puts up a China capital export policy examples and what kind of effect that really has on the global economy.
what the Chinese government is doing here is engaging in massive capital export – artificially creating a huge deficit in China’s capital account. It’s able to do this in part because capital controls inhibit offsetting private capital inflows; but the key point is that China has a de facto policy of forcing capital flows out of the country.
Now, bear in mind the two basic balance of payments accounting identities:
Capital account + Current account = 0
Current account = Domestic savings – Domestic investment
By creating an artificial capital account deficit, China is, as a matter of arithmetic necessity, creating an artificial current account surplus. And by doing that, it is exporting savings to the rest of the world.