I’d be negligent if I didn’t make some comment on this. First, you should probably be aware that Paul Krugman is gunning to have China labeled a “currency manipulator”. This was followed by support from 130 Congressmen.
Anyway, there is the small problem that China doesn’t particularly want to let their currency appreciate against the dollar. If China decided to sell all their Treasury holdings as a way of plunging the US into economic depression, they could do so with ease (and remember, we threatened to do that to the UK when they were our ally).
But what I really find funny (in a funny/weird, not funny/ha ha way) is that the whole world moved to a fiat currency system decades ago. That means that we’re all about currency manipulation. The US has more than doubled our currency in an attempt to inflate. We’ve provided half a trillion dollars in currency swaps with foreign banks so that people could bet against the dollar. That sounds a little like a currency manipulator. It’s not that we’re against manipulation, the whole world’s monetary system is nothing but manipulation. No, we’re against manipulation that benefits China at the expense of the US (never mind that the US manipulated the dollar for our own benefit at the expense of everyone).
China’s weak currency benefits the US by allowing consumers access to Chinese goods at a lower cost than they would otherwise pay. Of course, US consumers bought a bunch of useless crap, and now they have buyer’s remorse. Can you imagine us being unhappy if OPEC countries pegged their currencies to the dollar at a price that made oil cheap?
I only write this to provide an alternative viewpoint. The truth is that while nobody put a gun to the head of the American consumer and forced them to pay less for goods produced in China, that isn’t the whole story. Chinese labor practices aren’t necessarily all that different from holding a gun to certain laborers and forcing them to produce said goods for less pay. And for this reason, I can’t really say I have a strong opinion on this issue.
I see two possible outcomes for this:
China agrees to increase the value of their currency. The cost of goods produced in China increases here. Since that covers just about everything, the cost to maintain our quality of life increases. At the same time, interest rates in the US rise as China requires positive real returns on their investments in the US.
China gives us the metaphorical finger. They don’t increase the value of the Yuan relative to the dollar. Instead, they justify their own protectionist schemes.
Neither of those two options seem particularly good. I’m curious what the US is trying for here. This is something that bears watching.
