China and the US Dollar

China and the Dollar

China has a lot of them, more all the time; they keep rolling up surpluses, while we roll up deficits. Even in the Great Recession, China is raking in money, although there have been some US trade improvements: we are buying less, due to the recession.

China has a lot of advantages for trade: a hard-working, low-paid, workforce that rarely dares disrupt business with strikes or labor protests. Chinese labor is highly skilled, especially considering how recently China became an industrial power. And China's sheer numbers gives it a tremendous advantage.

But China has a heavy thumb on the scales--almost literally. The renminbi or yuan, the Chinese official currency, has been artificially undervalued for decades. The money measurement of Chinese export prices is skewed downward by that thumb. Chinese goods cost less than they should, because of currency manipulation, giving China a 20-40% competitive advantage over American goods--or German, or French--in our own markets.

The effect of this undervaluation doesn't stop with the huge US trade deficit. It has global repercussions. China is sucking up more and more money from all over the world, not just the US. When China insists on undervaluing its currency, it destabilizes the whole world economy. It's possible that the unbalanced trade/currency relations between China and the US, provided conditions for the 2008 financial collapse.

There is also the global effect of all that money going to a country that spends too little. Chinese savings rates are now an unbelievable 55%. So, money is withdrawn from the international economy and put into US Treasury bills. China doesn't buy imports with its money; it buys resources, mines, oil fields, real estate. It also induces corporations to build factories in China, because that's the only effective way for non-Chinese to crack the China market.

Now, China is facing inflationary pressure, despite a managed economy, while the rest of the world is flirting with deflation; recovery is held back by this huge trade imbalance.

Nobel Economist Krugman advocates a 25% surcharge on Chinese imports as a temporary measure to force China to revalue. He points out: we have China over a barrel. The Fed could minimize the impact if China sold large amounts of its dollar holdings in protest; the dollar would fall (not collapse), which would make the US more competitive. A declining dollar would also devalue China's remaining dollar assets.

Only Obama could do this. It would be an appropriate assertion of American power, and it could help the whole global economy.

I can hear the screams now! What, devaluing the mighty greenback?

Devaluation would be a powerful development and jobs policy, not a loss of prestige. It's way overdue.

Devaluation would also increase pressure to wind up our costly empire: it would cost more. I don't think that would be a bad thing.