Below (and here) is a letter that I sent this morning to the Washington Post. Can anyone tell me why more people don't pick up on this obvious inconsistency?
Treasury Secretary nominee
Timothy Geithner sides with those who worry, as you put it, that
"Beijing has kept its currency artificially low to keep the prices of
its goods cheap and generate trade surpluses. That has led to a global
capital imbalance, as American consumers borrowed and spent and China
became the United States' largest foreign creditor" ("Geithner Says
China Manipulates Its Currency," January 23). And he threatens to act
"aggressively" to stop this alleged wrongdoing.
Overlook the
reality that the only way Beijing can push the price of the yuan lower
is through inflation or other policies that weaken the Chinese
economy. Instead ask: why should the Obama administration be so upset
by Beijing pumping easy credit into markets at a time when this same
administration is deeply worried that credit has become too tight?
Sincerely,
Donald J. Boudreaux
Share
{ 50 comments }
Brilliant!
It's a shame that someone with Geithner's qualifications will be appointed Secretary of the Treasury: (1) since he could not fill his taxes properly, he kept the money advanced by the IMF to pay his taxes; (2) since he failed to supervise properly the banks and other financial institutions under his watch, he appointed some staff of these failed institutions in high positions in the NY Fed; (3) since he doesn't understand why China has been investing part of its large domestic savings abroad, he accuses China of manipulating its currency; and (4) since he has no idea what he has done with the bailout money already disbursed, he asks for more money.
Maybe a lot of people pick up on it…they've just come to expect that kind of thing from politicians.
…this could be wishful thinking on my part.
Maybe Mr. Geithner was too busy preparing several years of unfiled back tax returns in preparation for his Senate confirmation hearings to be Treasury Secretary. He didn't have the time to think through what he was saying.
Surely anyone Obama would nominate to be Treasury Secretary has a keen knowledge of money and finance, credit markets and foreign currency markets. Doesn't he?
I mean, we've been told that we have to overlook the fact that a tax cheat will be Secretary of the Treasury because Mr. Geithner is the best and the brightest guy around for this job and the current economic situation makes it absolutely vital that he be confirmed right away.
Can anyone explain to me how the "stimulus" package will reduce consumer debt? *crickets chirping*
The illusion that China can somehow stimulate their domestic demand so that they import more from the US while they keep on financing the US stimulus package has been present for quite a while in the minds of those hopeful for an easy way out. These characters also tend to forget that whatever investment in US public debt China has was used to finance past stimulus and past deficits… and can always be disinvested by China.
Per – China only disinvests in the USA when they want to stop their economic growth. There growth is directly linked to the USA, unless of course they prefer a pure subsistence economy.
History has not ended. Wars will happen in the future, it almost always happens when no one thinks it will. According to Nial Ferguson, couple of decades leading upto 1914 was a period of booming global trade, and no one thought world will go for each others throat. The bond market didn't see it coming at all. Then it all happened: the bloodiest of all wars.
People may suddenly decide to go for each others throat, let alone the threat of a subsistence economy.
China did manipulate its currency — they kept it stable against the dollar, when the trade deficit should have worked to weaken the dollar, making their exports more expensive (cutting our demand) and our exports cheaper (increasing theirs.)
Instead of letting the dollar drop, both countries took the easy way out. China just dumped all their excess dollars into treasuries and other U.S. investments, and the U.S. took the money and spent it on consumption, rather than balance our budget.
Now the bill has come due on both sides.
Oil Shock – I think you exaggerate the potential for a large energy war. The only country equipped to do it internationally is the USA with because of it's navy. Countries like China are literally farked, because no military with the ability to impose it's will anywhere on the globe, sustained.
They don't pick up on the inconsistency because it's not there. The situation is more complicated. China doesn't have significant inflation (indeed in recent years it has had deflation) because after the government buys dollars, it sterilizes that intervention. Do you think the sterilization hurt the Chinese economy? Given a double digit growth rate over those years that seems hard to argue.
Hugo – I think we need to look beyond GDP growth to things like overall standard of living. Can the average Chinese say that they have a standard of living that is anywhere equivalent to an American if you measure by basics:
* adaquecy of calories
* clean air
* clean water
* medical care
Forget the financial for a second, if the above 4 can't be met who cares about their paper growth.
i think it's funny he says he favors a strong dollar in one breath and accuses china of being a manipulator in the next breath. if he in fact favors a strong dollar, as he says, wouldn't he want china to manipulate (at least in the way they've been manipulating for the past several years)?
So why can't China accuse us of the same?
Isn't printing all these $s considered manipulation?
I'm probably missing something.
That would be true if China had a freely floating exchange rate. But it doesn't. The Chinese govt. has kept its currency artificially "low" (weak) by pegging its exchange rate against the dollar and rationing the availability of yuan at the fixed rate.
But just as you suggest, the US economy is not the victim but the beneficiary of this policy.
As Geithner said, in testimony 2 days ago to Jon Kyl (my senator):
“Sir, I grew up in Government. I am fully aware of the responsibilities and obligations it carries…”
Public response to Tim Geithner:
Sir, that is exactly what scares the hell out of us. You either cannot get your taxes right, or openly shirk your reporting responsibilities, like Caroline Kennedy. Now you wish to run the very agency you openly thwart.
Please tell us now why we should not arrest you immediately, much less appoint you?
I don't understand how the Chinese government can do XY&Z with regard to the credit market. The billions or trillions in U.S. dollars from the trade imbalance is held (mostly) in private hands is it not? Are the banks in China government controlled? I also don't understand how they can keep their currency artifically low, thus subsiding their industries. Can an intelligent person explain what's going on to me?
Strumpit (sorry), communist governments print money (and kill people) at will, so they pretty much can buy whatever they want, at the artificial cost of paying for it in their currency.
That caries huge negative economic implications (living in huts, shacks, working in Gary, IN).
We economists call that “bad.”
Wow! Awesome to see the great Larry White here.
From my book:
"Sincerest thanks to Janice Allen and Dissent School, and, Larry White, who opened my mind by kindness. I might even try that someday."
Larry was one of the four great instructors at Dissent School in Los Angeles almost thirty years ago, along with Jack High, David Friedman, and Tom Hazlett.
Larry told me what he thought was wrong with my theory of redistribution. Perhaps he'll be good enough to share his wisdom with the rest of you here. Wouldn't that be interesting? How about it, Larry?
Indeed, Sir Larry of UMSL (from Wash U guy, Dr. Roberts student), I bow to you.
"Strumpit (sorry), communist governments print money (and kill people) at will, so they pretty much can buy whatever they want, at the artificial cost of paying for it in their currency."
I said I wanted an intelligent explanation not a dumbass punk one. And you Libertarian want "free trade" with a bunch of killers on unfair terms. As long as sweatshop is involved in the manufacture of the goods, you guys love it, so you can wear cheap tennis shoes. Get a decent paying job, so you can afford Italian lofers. Oh, you can't find one? Move to China and work in sweatshop then. McDonald's doesnt' hire nasty political hacks and rabblerousers. Their BigMacs are handled with clean hands (health dept. standards). And you don't qualify from picking your nose while playing on your big brother's computer.
Btw, I just bought a new stainless steel refrigerator manufactured in Mexico. We have to support NAFTA and our neighbors to the south. A refrigerator made in Canada would be too costly to manufacture, on par with the U.S. If I thought it was made in sweatshop, with people losing their fingers and other bad things, I would rather have paid more for a U.S. or Canadian made fridge. I could have paid to fix my old fridge but at my age and after getting 30+ years out of my old refrigerator, I thought I'd treat myself to a new one. I did see a refrigerator that was 'assembled' in the U.S., made from parts from parts unknown. We no longer make stuff in this country, we just join the pieces together. That's the new economy for you.
My old refrigerator was probably made in the U.S. from unionized labor. We, in this country, used to make really good stuff. Those were our glory days.
Italian loafers for a bunch of loafers. How apt. Lol.
Q.E.D.
Trum..
"My old refrigerator was probably made in the U.S. from unionized labor. We, in this country, used to make really good stuff. Those were our glory days."
About ten years ago, I worked in a golf ball manufacturing plant in Florida. You can not get more closer to making widgets, save maybe hockey pucks. We competed against Titleist, that makes near half of all golf balls, and imports. We also imported some. We sold world wide.
What an education. Basically the owner and resident industrial engineer said the drill is, every year, produce more, at higher quality, less cost with less labor input. Or go out of business. We had a very flexible labor staff working on the Japanese industrial model (you know, you lefties don't buy Detroit, you buy Jap, Swede and German. How's that for solidarity!)
I asked him how Titleist stayed so strong. He said that everyone world wide can buy the same automation machines and chemicals. All you need is a checkbook.
By the way, we didn't make good stuff in those days. No body wants a good four radial engine aircraft, nor four drum brake cars, nor 1960's chemotherapy…..nor even to work in a 1950-60's factory.
Lastly, if lefties are so pro manufacturing, why is the conservative south so willing to 'affirmative action' plants as opposed to the Democrat, dying, elderly, high tax, young people fleeing dead economy and future debt payments liberal North? Matter of fact, even over pensioned Democrat government workers flee like East Germans from the people's paradises of the north to the cruel reactionary conservative backwaters of the racist south. Very peculiar.
Never mind that most of the trade deficit is because we import lots of oil. If we reduce oil consumption, we put a dent in the balance of trade, and keep money at home. This is where the efforts should be focused not China pegging to the dollar.
It is indeed an honor to have Larry White comment here at the Cafe.
For the record, I agree with Larry that a government need not inflate to drive the price of its currency lower IF it, like Beijing, pegs the value of its currency to the price of something else (say, the dollar) and then rations its currency among demanders of it.
But such a policy — if, indeed, the peg is below the true market value of the currency — is among those policies that otherwise weaken the economy. Most obviously, imports are made artificially costly, so standards of living are made lower, both because the availability of consumer goods is curtailed and the availability of lower-priced inputs for production is also curtailed.
Honor, schmonor.
Don, you're right. Exchange controls do count as "policies that weaken the Chinese economy". If I still have a clarifying point to make, it's that the weakening isn't (like inflation) the means to lower the exchange rate, but the side-effect of blocking trade (as you note).
To put things in perspective, see this article:
http://www.american.com/archive/2009/a-theory-of-two-big-balance-sheets
Prof Boudreaux,
Thanks for the great clarification.
Prof White,
Do you still believe that taking from the rich to give to the poor reduces inequality?
I don't think the Chinese government is stupid. Why would they shoot themselves in the foot? By creating a situation where their goods for export are artificially cheap they drive the competition out of business and they end up with a monopoly. Then they can charge more than if competition existed. If this is not the reason they manipulate their currency, then please tell me what it is? They don't love us, they love our money.
I don't think the Chinese government is stupid. Why would they shoot themselves in the foot?
OF course it is. Government economic intervention is a manifestation of mercantilist thinking. In the long term, such thinking is stupid.
Trumpit, I'll ask a question of my own. If our government likes us, why does it do so much deficit spending? Why does it screw up all the time?
In regards to monopoly powers through market mechanisms, I've never heard of any company being able to drive other companies out of business and then raise prices. I'd be interested in hearing of some examples. The fact is that companies, especially ones in a supposedly monopolistic situation, are not only in competition with other companies, they are in competition with potential competitors. This is why Wal Mart does not raise its prices even if its smaller competition in the town goes under. As soon as prices go up, there is more competition…
As far as why China does what it does, that is complicated. You are right, they are not idiots (at least they are only as idiotic as our government) and they have reasons. Like every other government, they weigh political considerations, costs and benefits, and then implement policies. Just because they have their reasons doesn't mean that the effects of those decisions will be good ones long term… We should always keep that in mind with ANY political issue.
Isaac Crawford
Trumpit,
Competitive or monopolistic, the free market price is always the best price for the consumers themselves.
Isaac Crawford,
If two companies are beating each other to death, it's because there is one too many, and after it's gone, the survivor MUST raise its prices, in order to go on serving the consumers.
I don't understand how the Chinese government can do XY&Z with regard to the credit market. The billions or trillions in U.S. dollars from the trade imbalance is held (mostly) in private hands is it not?
The USD do not stay in the hands of private individuals for long if at all. If a Chinese merchant decides to take USDs for the goods s/he sends to the U.S., that merchant will go to a bank to exchange those USDs for yuan. If, however, the merchant insists that the American pay him or her in yuan from the outset, the American will go to the bank and exchange the USD for yuan and send it to the Chinese merchant. No matter which way the transaction goes down, the USDs are repatriated into the U.S. economy, raising the capital account surplus and putting the the current account in further deficit.
Are the banks in China government controlled?
I believe that Chinese banks are quasi government-controlled with an 'ownership' stake of 51% by the PRC. That's only what I've heard from others though; I'm not certain.
I also don't understand how they can keep their currency artifically low, thus subsiding their industries.
They've been accused of deliberately affecting their money supply to peg their currecy to ours at a fixed rate. Up until about three years ago, they did do this and that peg rate was something like 8.4 yuan to 1 USD. They were supposedly willing to have their domestic policy one of making a tradeoff between keeping their goods cheap to their foreign markets (keep people working domestically) and creating inflation on those goods that they could have imported more cheaply if they hadn't caused their currency to purchase less from abroad — namely oil, steel, and other commodities that they use in production and, to a lesser extent, individual consumption.
Today, the Chinese allow their currecny to float against other currencies except that they don't allow radical swings in he daily exchange rate. Supposedly there's a lower/upper limits range on how much movement one currency rate can have in a day in relation to the yuan. Many people still think that the Chinese manipulate the rate and that they do not really float. Most libertarians say, "So what!? We're getting cheap goods and U.S. are percieving that they're getting a good deal because demand for Chinese stuff is strong. Let the Chinese send us cheap stuff; the vast majority of us are pleased with the arrangement. A handful of U.S. producers that make/sell products that have to compete with these foreign goods are not so pleased."
Can an intelligent person explain what's going on to me?
I do not know if I'm the intelligent person here but I took a stab at it. The real question is whether or not you'll actually seek to understand it and whether or not you wont go all off topic with it.
By creating a situation where their goods for export are artificially cheap they drive the competition out of business and they end up with a monopoly.
So, have they achieved monopoly yet?
Then they can charge more than if competition existed.
Wouldn't that just bring the competitors back? Think of the stronger financial position new entrant to the market would be. They wouldn't have had to endure the profit-limiting stupidity that the Chinese had to to establish their supposed monopoly. The competitors get out of the industry, put their capital to the next best usage, and have more assets when time to come back. Even if the same producers do not go back to their former industries, think of the idle manufacturing plants that can be purchased on the cheap if they have not be converted for different usage.
If this is not the reason they manipulate their currency, then please tell me what it is?
I gave my best explaination in a previous post.
They don't love us, they love our money.
Maybe they're altruists — like todays do-gooders that mis-named themselves Progressives. It can happen you know, they do practice communism, a concept that altruists cling to…you know, an equalitarian and classless society where the rich do not have undue influence on the poor and exploit them.
[/sarcasm]
Why should we care what the Chinese are doing to their currency? Don't we have enough to worry about with what our own "government" is doing to ours?
It would be a problem for us if they were making their goods more expensive; but, if cheaper, and enabling them to sell more to us than they bought from us, the surplus coming our way would be free gifts.
Since when don't the Democrats want something for nothing?
And if you really think it's better to give than to receive, I'll take check or credit card, but, please, no California IOUs.
The answer to my own question, of course, is that this creates unemployment in the US.
But that's the wrong answer. Cheap foreign goods are not the cause but cure for unemployment in the US.
Neither the Chinese nor any other foreigners could tell Americans not to work, not to better house, cloth, feed, and employ one another. Only their own "government," by pricing American labor out of the market, could do so. The cheap foreign goods, on the other hand, by reducing the cost of doing business in America, price it back in. So, without them, there would not be more but fewer jobs in Ameirca, and at lower pay, for the cheap foreign goods raise the purchasing power of the dollar and real wages.
And, by the way, does anyone here, besides Prof White, still believe that taking from the rich to give to the poor reduces inequality?
Suppose you're rich. I take all you have and give it to another man with nothing. Then you are poor, and the other man is rich. If I then return the riches to you by taking them from the other man, what happens to inequality?
And, by the way, after I take all you have and give it to the man with nothing, doesn't the other man have less than you had previously, by your theory? If so, isn't the difference between you diminished?
It is increased.
This is where I think the Federal Reserve's inflation has been hiding, and soon it is going to reveal itself.
The Chinese receive dollars from the U.S. in exchange for goods. They then loan these dollars back to the U.S., whereupon they are spent on more Chinese goods. Since imports from the U.S. have been kept artifically expensive, these "new" dollars are then loaned back to the U.S., only to be spent on more Chinese goods.
China keeps increasing its supply of goods to the U.S., and thereby counteracting the inflationary effect of an expanding money supply. Meanwhile, it invests dollars to get more dollars instead of purchasing goods back from the U.S. But its "investments" are being either malinvested or blown on consumption.
The ability of the U.S. economy to honour its debt to China (i.e. the claim on goods and services which its dollars represent) is being undermined. But since imports from the U.S. to China are being kept artificially expensive, for the time being, nobody notices. Meanwhile, the U.S. economy is restructuring and becoming a "service sector economy", and producing fewer goods which foreigners will want to purchase.
The penny is on the verge of dropping, and all that inflation the Federal Reserve has been deferring will come to fruition in a hurry. When supply dries up from the east, there will be nothing to counteract the inflationary pressure. How long can they fool the Chinese into "investing" in the U.S. in echange for more goods?
I hope that I am wrong.
Martin,
Suppose I took your underwear from you (and don't ask how I got it), gave it to another, and then back to you.
Would it still be the same underwear?
I can't give you back exactly the same goods I took from you, nor the time, nor the sense of security.
You have been robbed of things of real value to you.
To be induced to produce as before, you must be compensated, not for your past losses, but those you have been taught to expect. You must be paid more than before, and, conversely, the other fellow, less.
Lee Kelley,
Thanks for a brilliant analysis, as usual from you.
So if I was richer than you before the distributions and if I get back less afterward, aren't we more equal after by the amount of my loss? Or do you also lose something in the process?
I suppose so, but how do you know I didn't rob them from someone else first? How do I know it for that matter? Aren't things distributed and redistributed continually?
They'll want our food among other things. China's population is aging at a frightful rate, because of the one child policy. For decades, China has grown rapidly, both because her labor force has grown and because she has increased productivity by modernizing, but even after this rapid growth, her per capita GDP is only about twelve percent of the U.S. value, based on purchasing power parity, according to official statistics. These statistics are suspect, but I doubt that they're off by a factor of ten.
Within the next ten years, China's labor force peaks, but her senior population continues growing rapidly. The pressure on her relatively labor intensive agricultural sector will be particularly acute. Both China and the U.S. are net exporters of food, but over 23% of China's population farms, compared with 2-3% in the U.S., and China's population is nearly five times greater on roughly the same landmass.
The U.S. has a similar problem, but the U.S. labor force actually peaks a bit later, and the U.S. can easily support more immigration and more growth in agriculture. It can quadruple its agricultural output and still employ fewer people in agriculture than China, per capita.
China accumulates entitlement to U.S. output now to feed her aging population in coming decades. Our problem here is that our entitlement state has promised too much to too many of our own people, and I don't just mean Social Security. Social Security is the tip of an iceberg of rents. If you aren't quite high on this iceberg already, hold your nose.
Don,
How much is inflation in China and is it increasing?
Martin Brock,
You wrote:
"So if I was richer than you before the distributions and if I get back less afterward, aren't we more equal after by the amount of my loss? Or do you also lose something in the process?"
Interference with the market is always counterproductive, because, for every action against it, there is an opposite and more than equal reaction.
You were looking only at the action and not the reaction.
Because of it, I "also lose something in the process," your incentive to serve me.
You wrote:
"…how do you know I didn't rob them from someone else first? How do I know it for that matter? Aren't things distributed and redistributed continually?"
I would suggest that you return anything you may have robbed to its rightful owners.