On Low-Priced Currencies

You just changed your story quite a bit. So now Chinese workers are forced to work at some wage they don't want to work at.

No. Same story. All wages are influenced by factors other than the desire of the wage earner.

But this wage is in Yuan! What if it were in $? Would that make a difference?

Again, if the wage earner can't buy things priced in $, a $ wage is worth nothing to him.

You may be right that people are forced to go to work, but why would it matter if they were paid in Yuan, $, rocks, sticks or Pieces of Eight?

People aren't forced to go to work. Work is necessary to produce anything, and people want to consume things.

Being paid in yuan involves accepting many forcible decrees of the monetary authority. These decrees affect the real value of wages earned in yuan.

By the way, why are people all over China rushing to get to work if they don't want to?

Why do you say that people all over China don't want to work? I never say such a thing. It's a straw man.

Are they being threatened? Is the threat different dependent upon fixed vs. floating exchange rates?

Yes, they're being threatened. Yes, the threat might take a different form if exchange rates floated. I discuss another form above, where you accuse me of changing my story. I don't change the story as much as I change the form of authority exercised.

The question is: why are the Chinese working for yuan? Why not gold or banknotes leveraging gold deposits?

The answer involves obligations to pay taxes in yuan, legal tender laws compelling debt settlement in yuan, the holding of many productive resources by factors benefiting most by trading in yuan within China and many similar issues. Money is a charta. See the work of Georg Knapp for example.

I don't think the fact that some Chinese bureaucrat spends his time monkeying with the Yuan makes it more likely that anyone cares about his monkeying.

This bureaucrat is only one factor in a complex network for forces. You can't understand the effect of a complex network of forces by focusing entirely on one factor and ignoring all the rest.

"This bureaucrat is only one factor in a complex network for forces. You can't understand the effect of a complex network of forces by focusing entirely on one factor and ignoring all the rest."

Bravo. I don't care if you appreciate my accolades. Bravo. It's nice to read my own thoughts from someone else, and that's the only pleasure I need derive from this.

Well, I think you can ignore most all of the other forces because each time a factor is brought up, it turns out that it is irrelevant whether that factor is priced in yuan, sticks, stones, gold etc.

A worker reaches some type of agreement with an employer relative to the medium offered. Perhaps if the medium were gold, a worker would take a different amount of it than the official gold price in China. Thus the actual price of gold is what the worker will take for it, not the number set by the government. Same goes for Yuan.

It isn't very complex. People tend to want stuff. People exchange labor/merchandise/cash/gold for stuff as they see fit throughout the supply chain, not based on any official exchange rates.

JBP

That a Chinese worker must price in yuan and may not price in $ or gold or anything else, because he's compelled to pay taxes in yuan and otherwise use yuan in settlements, while the Chinese monetary authority fixes the exchange rate, is relevant. Ignoring this fact doesn't change it.

Again (and again), you're saying that my freedom to negotiate one price trumps every other consideration. You assume that I'm powerful enough to overpower the state and its monetary authority, but you're mistaken.

We've repeated this exchange often enough. You may have the last word.

It's every price in the supply chain. They all work the same way. A worker works more or less based on what he gets paid. The currency of payment is meaningless. It is the same for component goods as it is for labor...a negotiated price. If labor doesn't get paid enough, they work less. If a supplier doesn't get enough, he ships less. Holding a gun to a suppliers head to get him to deliver at an unacceptable price doesn't like doesn't work very well in practice, but has nothing to do with exchange rates. You may have identified the gun to the head argument, but there is still nothing important about official rates of exchange.

The day I am concerned with the Yuan/Dollar exchange rate when writing a purchase order or paying an invoice is the day that your argument becomes coherent.

JBP

I actually agree here. We bear most of the benefit of the Chinese trying to keep their currency prices down, and they bear most of the pain. I feel sure however that it will hurt us when they end it, although I haven't actually worked this out yet.

See above. The end of mercantilism, on the scale of China's, is like the end of artificially cheap credit. I defend this theory anyway. It's like Hayek's.

We can buy many goods from a mercantilist state more cheaply than we can produce them ourselves, so we do. The mercantilist state imposes these costs on its own subjects, not on us; however, since we don't produce these goods ourselves, we produce something else instead. We're obviously richer this way, not poorer.

We produce these other goods (in the volumes we produce) only because we can purchase the discounted goods from the mercantilist state. If the mercantilism suddenly ends, our economic organization is unstable. Our demand for imports falls. Some resources devoted to importing, and to producing other goods, reorganize to produce goods formerly imported. The longer the mercantilism lasts, the stronger this shock is.

The shock is much worse if we cannot produce goods formerly imported, because in the midst of the mercantilism, we've sold the mercantilist states exclusive rights to produce for our market or otherwise entitled the mercantilists to rents imposed on our economy, like entitlement to our tax revenue.

And that's what we're doing.

Beautifully restating something that I said before. Thank you. I hope you don't dislike agreeing with me, because you are agreeing with me. And it's gratifying to have someone else be on the side of sanity.

Yes, I read your earlier posts and left a short quibble, but I essentially agree with you. When I disagree, I leave more than a short quibble. :)

JBP,

No, we can not raise our Caterpiller price beyond what the market will bear, and with their copies, the bad penny drives out the good.

In fact they reverse engineer, rip off and under cut our markets in every conceivable goods you can name.

In fact I even have a copy cat "Gibson" guitar in my office, a total rip off, but it looks like the real thing to someone who does have a real item to compare to. These fake Gibson guitars have put American's building real Gibsons into unemployment.

They illegally copy CDs, DVDs by the ton.

They are becoming a dangerous exporter of military goods, and they will sell to anyone with a harder currency than their own, including failed states which in turn are subsidized by other nations like the Saudies.

And all of this is made possible because of the net profits they accrue thru predatory export practices, supplementing their export oriented manufacturing business with investment capital the government makes available to their industries, again all made possible by fixing their currency below its float value.

Well, if they are going to buy up all the tractors, I think I would price them very high and make more margin, right? Would serve them right for trying to buy them all. If they won't pay up, they get no tractors, simple as that.

**
Except for there is no Chinese Caterpillar, Microsoft etc...I'll agree with you that there needs to be more (some?) protection of intellectual property, but it has very little or nothing to do with the the currency, which is sure smells like a red herring to me.

As Don explains, if currency manipulation is happening, Chinese companies are getting less money than they could from US consumers. Wouldn't that mean if they stopped manipulating, they would get more money from us?

JBP

Speaking of red herrings and canards, they are obviously not going to buy all of them. They will buy just as many as they need of anything they intend to copy and reverse engineer, then they will apply their vast currency reserves to building factories to make copies, and under cutting our manufactured goods as they all ready do, in everything from guitars, to DVDs, to tractors, to weapons.

"China hit with $2.2 billion software piracy lawsuit"
http://www.telegraph.co.uk/news/worldnews/asia/...

"Japan Stocks Boosted by Foreigners at 2009 End, as Yen Weakens"
http://www.bloomberg.com/apps/news?pid=newsarch...

And why would Japan want a weaker Yen if it didn't help them (net), given employment, cost of resource imports, etc?

The Chinese manipulate their currency to keep it low, without which they would sell fewer goods abroad and the average Chinese worker would otherwise have less hours of employment, so no, by keeping the Yuan low, they increase their net income, by gaining market share and thus selling more goods abroad, as the trade imbalances prove beyond a doubt. This more than offsets what they (as individuals) would personally gain with a marginally stronger Yuan.

Don analysis, and your reasoning is faulty.

Understood to be said nicely, I hope ;)

Well, by your logic, the Chinese could buy all the Caterpillar tractors in the world any time they want, without any change is the price of the tractor. That is not correct, nor have they succeeded in competing head on in tractors or many other industries.

Japan's economic policy hasn't really worked out for a long time either, so the argument that *well, japan is doing it, so it must make sense* doesn't hold much water.

It sounds to me like the Chinese are trying to make less money because of their purported currency manipulation, which does not sound very likely either.

JBP

I'd say that the point is that this currency regime hurts both the Chinese AND Americans, as I have said several times before, but that it will hurt Americans more in the long run. This point no one seems to consider. Both countries are getting screwed, but the Chinese will be relatively less screwed.

The currency manipulation debate is now over. Last year there was a complete flat line of the yuan:us dollar. This was not the most amazing coincidence in history but blatant pegging.

The next debate is encompassed in these comment threads. Keeping the yuan low is a subsidy for the elites of the Chinese Kleptocracy. This artful practice hurts the average Chinese economically by lessening their spending power for foreign and especially U.S. goods and services.

Incorrect.

While its true that a cheap yuan makes resource imports to China costly, they obviously are further ahead net by paying that penalty and they more than make up for it with predatory manufactured goods export financing.

The simple fact is that all of the major low wage predatory export nations are the entities with vast capital reserves they have accumulated from the nations they prey upon.

When, theoretically, China sees that is cost of resource imports outweigh its capital reserves gained thru subsidized manufactured exports, they will allow their currency to float upwards, or they will reset it upwards to deal with that problem, no one will have to compel them to do so.

The western nations, particularly the US are fools to allow these predatory practices, especially those of China, and the US is now seeing what the cost of exporting millions of jobs, and dozens of entire industries can do to an economy.

But...the Chinese buy stuff in $$. If we don't like the price they are offering for soybeans or something, why sell to them?

If the Chinse can't buy soybeans or Caterpillar Tractors, it would be their loss, right?

JBP

There is a world market for everything, if we (the US) do not get a good enough offer from the Chinese for our wheat or US manufactured tractors we will not sell them to the Chinese, provided the market supports the items sale to a higher bidder.

And the Chinese subsidize their manufacturing export industries to take advantage of their cheap abundant labor, in exchange for "harder" foreign currencies.

But as you know the US - China trade balance is far in their favor, as is China's balance of trade, including resource imports, with all nations, if it were not they would have run out of those currency reserves.

In fact they have so much reserves in foreign currencies they are subsidizing their manufacturing industries beyond the point where those industries can sell all of those exports, hence they have recently announced tighter credit policies lately.

But China's real estate and manufacturing bubble are not going to accrue to our favor, but it is a treat to international trade levels.

When a major international trading country (China) does not allow its currency to float, when all other currencies do float, it creates these tremendous distortions in the price of everything.

Even China's Asian neighbors realize China is stealing jobs from their economies as well, given their predatory trade policies.

Right, but then they don't get the Caterpillar. If they value the Caterpillar more than the currency, then they get the tractor. Caterpillars must be pretty useful, or the wouldn't make them in Peoria.

The floating currency is a canard. There is only one price for most everything on the world market.

JBP

Wrong.

The truth is with all of the currency reserves they have amassed, they can buy all the Caterpiller tractors they can use and still have hundreds and hundreds of billions of US dollars to spare.

They can take our Caterpiller tractors, reverse engineer them, build new factories to make their copies and undercut our prices with their versions for sale to export, under cuting our export markets and all at our expense in IP which they do not honor, and with our currency reserves they got due to their currency manipulations.

More importantly for the future they can use this leverage and invest in new manufacturing technologies for new goods like wind turbines, and under price us due to their economies of scale, as well as under cut us on labor costs.

And in fact there is a different price for everything in the markets, given that transport costs and availability always have to be factored in.

"they can buy all the Caterpiller tractors they can use"
But then we make more or raise the price, regardless of the demonic currency manipulation.

If they were going to reverse engineer Cat's, I am sure it would have happened by now. It hasn't, nor will all the imagined currency manipulations in the world help China very much in that matter.

Les, I think you should try Itunes as well, and think about different prices in different markets.

JBP

I have been in import/export from China for 20 years now and I am lost here....American business negotiates with Chinese business in US$ not Yuan, Ducats, Pieces of Eight etc.

If the cost is too high, there is not some magical adjustment that takes place; it is just another cost/price negotiation. This is repeated tens of thousands of times a day in thousands of industries.

At the actual goods exchange level, there is never any talk of yuan vs dollars. It is all $, as is a lot of trade in UK as well.

Same goes for US Export to China.

I am sure there is currency speculation and hedging going on, but that is not the physical trade. Physical trade for soybeans, electronics, steel, tractors etc is in US$. The currency translation occurs away from the connection point in the market.

JBP

American business negotiates with Chinese business in US$ knowing that Chinese business buys Chinese factors of production, particularly labor, with yuan and must therefore exchange US$ for yuan before producing what it sells for US$.

American business also knows that China's monetary authority continually creates yuan and exchanges the currency for dollars at a rate below the rate that would prevail if the rate were not fixed this way.

This policy of creating entitlement to consume Chinese factors of production has real effects. That Chinese business, rather than U.S. business, exchanges US$ for yuan is irrelevant.

Suppose the US$/yuan exchange rate is not fixed, and suppose the Chinese state taxes Chinese producers, converts the tax revenue (in yuan) to dollars in a currency exchange market and then subsidizes exports, i.e. it pays 20% of the negotiated price of exported goods for the foreign importer. The effect is the same, and U.S. business still negotiates prices in US$.

The idea that the fixed exchange rate doesn't matter is like the idea that income taxes don't matter. If Uncle Sam taxes my income, I just negotiate a higher wage, so I lose nothing. Right? All the bellyaching over income taxes is a waste of time, because income taxes don't really cost taxpayers anything. Right?

Of course, but why does that matter to the US importer? exporter?

The Chinese can use rocks and sticks internally for all that it matters to me. When they trade with the world, they use dollars, Euros and Pounds.

JBP

See above. The U.S. economy is driven forward along an economic development trajectory that ultimately is not sustainable, because China's growing, export-driven economy attracts more production of established goods while the U.S. economy explores "newer" goods.

Demand for these newer goods exists only within the U.S. economy, and much the demand exists only while the subsidized imports from China exist. When the import subsidies disappear, demand for the newer goods disappears along with it, and the U.S. economy contracts as it backtracks along this economic development trajectory.

If U.S. producers may produce goods made more expensive by the cessation of import subsidies (and similar to goods formerly produced domestically), this backtracking isn't such a problem, but the U.S. government itself (in cooperation with the Chinese government through international treaties creating international monopoly rights) can prevent this backtracking.

More simply, while China's export subsidies persist, the U.S. is richer. We become accustomed to the riches. When the subsidies end, we become poorer. Some of us become much poorer, because China accumulates monopoly rights to produce goods that we would have produced without the subsidies, i.e. China becomes entitled to rents imposed on U.S. producers.

China's stash of Treasury securities is only the most obvious and irrefutable example of this entitlement to rents imposed on U.S. producers. The Treasury securities could be only the tip of a rentier's iceberg. That's the problem, but it's not simply a trade problem. The problem is that our government sells the entitlement to rents.

We avoid the problem by refusing to pay the rents. We resist higher taxes, inflate away the value of Treasury securities and interpret away the value of patents and such with judicial creativity. But will we?

Martin Brock: "China accumulates monopoly rights to produce goods that we would have produced without the subsidies"

What makes you believe the goods - the ones we import from China - would have been produced in the U.S. had the subsidies not existed? U.S. companies were offshoring production - and consumers were accelerating purchases of imported goods - for a couple of decades before we started importing so much from China.

Right, and other countries, like Japan, have had currency-manipulation agreements with us for as long, and we have had deficits with them for as long, as what you're talking about, so your point is entirely worthless.

What makes you believe the goods - the ones we import from China - would have been produced in the U.S. had the subsidies not existed?

Chinese monetary authorities pay us to purchase goods produced in China. I'm not suggesting that every laptop computer imported from China would have been produced in the U.S. without the subsidies. On the margin, without the subsidies, more goods produced in China would be produced in the U.S. or purchased elsewhere.

U.S. companies were offshoring production - and consumers were accelerating purchases of imported goods - for a couple of decades before we started importing so much from China.

Mercantilism isn't the only reason that international trade and offshoring occurs, and China didn't invent mercantilism. I am not suggesting that international trade is a bad thing, but subsidies distort the useful specialization that would occur without them, by confusing signals of unsubsidized comparative advantage.

I am not suggesting that we restrict imports in retaliation for subsidized imports either. I'm suggesting that we stop creating faux "investments" for Chinese monetary authorities by selling them entitlement to U.S. tax revenue and by selling monopolies on the production of goods for sale in the U.S. We can buy as much subsidized stuff as anyone wants to sell us. That's not our problem.

martinbrock: "I'm suggesting that we stop creating faux "investments" for Chinese monetary authorities by selling them entitlement to U.S. tax revenue"

if you are meaning that the federal government should reduce its deficit, then I agree wholeheartedly. But that has nothing to do with yuan exchange rates or with Chinese purchase of U.S. Treasuries.

martinbroak: " by selling monopolies on the production of goods for sale in the U.S"

What are you talking about? What monopolies? U.S. businesses and U.S. consumers are free to purchase goods and services from just about anywhere on the globe. The government of China is likewise free to peg its currency to whatever it wishes.

Chinese monetary authorities can't purchase U.S. Treasury securities that the U.S. Treasury doesn't sell.

International patents are international grants of monopoly. Where U.S. consumers may purchase is not the issue. What U.S. producers may produce is the issue.

Again, I don't care how China pegs its currency. China's state can seize every bit of Chinese produce and give it all to me. I think that's great. It can also lend me every dollar that it gains by selling yuan for dollars. That's great too, as long as the United States government maintains a liberal bankruptcy policy and doesn't tax you to pay my debts to Chinese monetary authorities.

Just a question,
Have you actually ever seen a purchase order for Chinese Goods? An invoice?
JBP

You just can't deal with the fact that you can't directly counter any of martin's arguments! So you quibble over "invoices"! At what straws you are grasping! I'm sorry, respect yourself more than to debase your intellectual currency!

Reality is a tricky partner to theory. Sometimes it doesn't agree, but it can't be ignored.

JBP

But they get paid in Yuan, right? Would they get paid more if they were paid in $?

If they can't buy anything in $, they get nothing if paid in $, but that's irrelevant. You can't see all of the forces incident on these workers if you're wearing blinders obscuring every transaction not in yuan.

The trillions in foreign reserves accumulated by Chinese monetary authorities have value, the marginal value of forcible authority. Chinese workers have the marginal value of their labor. Chinese statesmen have the marginal value of their forcible authority, the value of their guns.

Some of the value of this forcible authority shows up in the dollar reserves of monetary authorities, but most of it is a gift from these authorities to importers of Chinese goods, because the authorities are buying export markets. Buying markets this way needn't cost the importing economy anything, but our own statesmen use their authority to impose a cost by selling monopolies here to Chinese statesmen there. Treasury securities are only the most obvious and irrefutable example of this exchange.

Or would the employers negotiate with the workers to reach the same price regardless of the official exchange rates?

The real value of the yuan in the worker's paycheck would not be the same if Chinese monetary authorities conducted a radically different monetary policy, just as the value of the paycheck would differ if the Chinese state imposed a payroll tax "on employers". I don't see any deduction for the "employer's share" of payroll taxes attributable to my employment in my paycheck. Do these taxes have no effect on my real compensation, just because I don't see them?

But a Chinese worker, just like an American worker, negotiates on the net value of what he gets for his labor. I'll make the bold assumption that workers try to get the maximum amount of value, be it in Yuan, Dollars, sticks, or stones, for their labor. Chinese employers the same...they try to pay as little as possible to receive as much value as they can.

Do you actually think that people work for less because of a ficticious exchange rate? Wouldn't the exchange rate be near totally irrelevant to the amount of Yuan paid to workers, just like it is totally irrelevant to the amount of $ paid to Chinese exporters by US Companies?

JBP

But a Chinese worker, just like an American worker, negotiates on the net value of what he gets for his labor. I'll make the bold assumption that workers try to get the maximum amount of value, be it in Yuan, Dollars, sticks, or stones, for their labor.

A man with a gun held to his head also negotiates with the marginal value of his resources, but the marginal value is smaller with the gun to his head, because guns also have marginal value.

Do you actually think that people work for less because of a ficticious exchange rate?

The rate is not fictitious. It is established by the same state that imposes taxes, legal tender and other forcible decrees on Chinese citizens. If these decrees have no value, I must wonder where all the aircraft carriers come from.

Wouldn't the exchange rate be near totally irrelevant to the amount of Yuan paid to workers, just like it is totally irrelevant to the amount of $ paid to Chinese exporters by US Companies?

No. If the fixed rate is irrelevant, the monetary authorities don't bother fixing the rate. They have definite objectives in mind.

Suppose China's monetary authority doesn't fix the rate. Instead, it allows the rate to float in an international currency exchange market. It also taxes Chinese citizens and uses the tax revenue to finance an export subsidy, rebating 20% of the price paid for any Chinese export to the purchaser.

Would this policy be irrelevant? Chinese workers could negotiate pay raises to offset the tax. Right? All of the taxes levied on you and me are also irrelevant. Right? We don't really pay the taxes, because we negotiate higher wages to offset them. Right?

If you want to continue, start with a new post at the top of the thread, so we don't drift further right. I'll look for it at the bottom over the next few days. I like the new comments section, but this indenting behavior needs rethinking.

Hmm..

You just changed your story quite a bit. So now Chinese workers are forced to work at some wage they don't want to work at. But this wage is in Yuan! What if it were in $? Would that make a difference? You may be right that people are forced to go to work, but why would it matter if they were paid in Yuan, $, rocks, sticks or Pieces of Eight?

By the way, why are people all over China rushing to get to work if they don't want to? Are they being threatened? Is the threat different dependent upon fixed vs. floating exchange rates?

I don't think the fact that some Chinese bureaucrat spends his time monkeying with the Yuan makes it more likely that anyone cares about his monkeying.

JBP

I'm starting over at the bottom of the thread.

The answer is irrelevant. Again, that Chinese business, rather than U.S. business, exchanges US$ for yuan is beside the point. The exchange still occurs, and yuan still purchase Chinese factors of production. I make this point earlier, and you simply ignore it. That you don't see the exchange is not evidence of its absence or of its irrelevance. It's not absent, and it is relevant.

Martin,

Who doesn't know that Chinese companies purchase from Chinese suppliers? Adds nothing to the discussion of where does the price/cost negotiation take place...which obviously in dollars. The price developed by the Chinese supplier already takes into effect the any so called manipulations to currency before the price is offered to the US Customer...and vice versa.

**
Still, as an aside, have you ever actually seen a purchase order or invoice to/from a Chinese company? I think there might be an easy explanation as to why there are so many long-winded explanations to the Yuan/Dollar discrepancies.

JBP

Who doesn't know that Chinese companies purchase from Chinese suppliers?

The point is that Chinese exporters purchase from Chinese suppliers in yuan.

Adds nothing to the discussion of where does the price/cost negotiation take place...which obviously in dollars.

It adds the fact that Chinese exporters may accept fewer dollars and still profit from exchanging the dollars for yuan while paying their suppliers.

The price developed by the Chinese supplier already takes into effect the any so called manipulations to currency before the price is offered to the US Customer...and vice versa.

Again, you're assuming that rents imposed on monetary transactions make no difference because people somehow are supposed to compensate for the rents in their price negotiations.

If this assumption is true, my income taxes cost me nothing, because I always demand higher income to compensate.

The conclusion is absurd. Aircraft carriers are not free in reality. They actually consume real resources. Taxpayers actually pay for them.

I make this point earlier, and you simply ignore it.

Still, as an aside, have you ever actually seen a purchase order or invoice to/from a Chinese company?

No. I don't write checks to the IRS to pay my income taxes either. My employer withholds the taxes from my paychecks. So what?

Congress could impose the income tax "on employers", still basing the tax due upon employee income, so that I receive my full negotiated salary rather than a paycheck with "my tax" withheld. This rearrangement of the numbers obviously makes little difference to me.

I think there might be an easy explanation as to why there are so many long-winded explanations to the Yuan/Dollar discrepancies.

The long winded explanations have nothing to do with purchase orders or invoices to/from Chinese companies. Your purchase order is a non sequitur.

Wow. I just can't believe the level of denial here. I would expect it from a socialist or Keynesian or a sanitarium resident or any of the number of the Average American Herd. But really, a regular Cafe patron, one who (I think) is free-market? Basically what they're arguing is that government intervention has no distortion on the economy, and that's absurd! This whole site is losing some major credibility with me, and I'm increasingly of the opinion that I shouldn't even bother wasting my time reading articles or commentary and should avoid it altogether. Sure, no one cares if I avoid this site; it might even be welcome; but it can't just be me, and I seriously wonder about the motives of some of the supposed "Austrians" on this site.

Well, your total lack of negotiation experience is indicative of a purely theoretical knowledge set, which does not test out in practice. It does however lead to sniffy, longwinded responses. I'll suggest downloading the same music from several different national versions of Itunes to gain tiny bit of practical experience to test your theories.

Cost and price convey a lot of information that do not require a knowledge of the components of cost and price. In general, I am agreeing with you, Yuan manipulation doesn't matter much, but as you are a sniffy person, perhaps some practical experience would be advised before typing your tomes.

JBP

He's clearly disagreeing with you and contends that Yuan manipulation DOES matter. What kind of trick are you trying to pull here? Did you confuse this with the third-grade version of the Cafe Hayek website?

Lol, theory has no basis in reality, right? LOL LOL LOL. So don't approach economic problems by using any sort of theoretical or logical framework? Theory and logic are useless, right? So we can just discard science and economics and Mises and Hayek and Einstein and Newton and the whole rotten bunch! How pathetic.

You say nothing in the first paragraph.

Prices convey information. Prices of Chinese exports convey information about a mercantilist Chinese monetary policy as well as information about Chinese comparative advantage, thus adding noise to the comparative advantage signal.

I don't say that yuan manipulation doesn't matter. Your "sniffy person" thing is meaningless. Your Chinese purchase order experience is irrelevant. Your conclusions from the experience are non sequiturs. That importers of Chinese goods negotiate prices in dollars is irrelevant.

I am back to rocks and sticks. If the Chinese have some internal manipulations that only effect products before they are exported so be it.

But if payments internal to China are completely shielded from world market (unlikely) wouldn't they still adjust to whatever number brings the most gain to each player in the internal supply system? It's not like a Chinese worker gives a discount to his employer for paying in Yuan.

The only points I can see where exchange rates matter (much) are in import and export...and neither of these are in Yuan, because no one in their right mind believes the official exchange rates.

JBP

It's not like a Chinese worker gives a discount to his employer for paying in Yuan.

The Chinese worker accepts yuan, because he has little choice. It's like he pays pays a rent to the Chinese monetary authority.

So if I have this straight, you think a Chinese worker would get paid more if he got paid in $ rather than Yuan?

JBP

If China's monetary authority didn't fix the exchange rate, Chinese producers would get more dollars for their yuan.

But they get paid in Yuan, right? Would they get paid more if they were paid in $?

Or would the employers negotiate with the workers to reach the same price regardless of the official exchange rates?

JBP

Martin Brock: "Demand for these newer goods exists only within the U.S. economy"

What "newer goods" are you referring to which are demanded only within the U.S. economy?

Pharmaceuticals? No, we're the world's leader in pharmaceutical production, much of which we export..

Aircraft? No, our Boeing and Bell and Sikorsky aircraft are sold all over the world.

Medical equipment? No. The U.S. exports many billions of dollars of sophisticated medical equipment.

Software? No. Companies such as Microsoft and SAS Institute and Oracle continue to sell their products all over the globe.

According to the CIA World Factbook, U.S. exports in 2009 were estimated to be $1.38 trillion.

What "newer goods" are you referring to which are demanded only within the U.S. economy?

I can't know until the export subsidies end, because I'm not a hundred million independent U.S. consuemrs. I can speculate. We might upgrade our laptop computers less frequently and as a consequence purchase less operating system software produced in the U.S., since most of us buy OS software only when upgrading our hardware.

Pharmaceuticals? No, we're the world's leader in pharmaceutical production, much of which we export..

If we pay more for laptop computers, we may choose to pay less for pharmaceuticals in order to maintain our consumption of laptop computers.

Aircraft? No, our Boeing and Bell and Sikorsky aircraft are sold all over the world.

No one is suggesting that the U.S. produces nothing, but if we must pay more for goods imported from China, we may choose to pay less for vacation airline travel. Vacation airline travel is a "newer" good. It didn't exist at all a century ago, and we demanded much less of it when I was born. I demanded less of it a decade ago when I earned less and payed more for laptop computers..

Medical equipment? No. The U.S. exports many billions of dollars of sophisticated medical equipment.

Domestic purchases, along with prescription drugs, will be arranged even more exclusively within the state sector soon enough, so we'll consume what central authorities decide we need.

Software? No. Companies such as Microsoft and SAS Institute and Oracle continue to sell their products all over the globe.

We're discussing their domestic sales, but lower Chinese export subsidies could also lower demand for these services outside of the U.S. People inside China consume more, people outside China consume less, because the export subsidies have the opposite effect now.

According to the CIA World Factbook, U.S. exports in 2009 were estimated to be $1.38 trillion.

According to the CIA World Factbook, U.S. imports in 2008 were estimated to be $2.117 trillion. Don't know where you found the 2009 estimate.

We're dicussing the bilateral relationship with China.

martinbrock: "We're dicussing the bilateral relationship with China."

No, we're not. You are the one who asserted that

"Demand for these newer goods exists only within the U.S. economy"

Yes, we are. Anyone can read the original post and see that you've snatched the sentence fragment from its context. The post is all about the bilateral relationship. You're incredibly disingenuous here.

As soon as you stated that:

"Demand for these newer goods exists only within the U.S. economy"

you attempted to expand this thread beyond a bilateral relationship with China. You can now argue that you were meaning there was no Chinese demand for newer American produced goods, but you and I know that's not what you meant in the comment.

martinbrock: "No one is suggesting that the U.S. produces nothing"

That's true. Your assertion was:

"Demand for these newer goods exists only within the U.S. economy"

That is completely untrue. Just admit that, martin.

That is completely untrue. Just admit that, martin.

Again, we're discussing the bilateral relationship with China. "Only within the U.S." is relative to this relationship. China imports far less from us than we import from them, because most Chinese consumers do not demand much of the newer produce.

But even within the bilateral relationship, "more within the U.S." is a better choice of words, and I have no problem admitting it. That Chinese consumers consume some of these goods doesn't change the fact that U.S. consumers consume more of them and would consume less of them without the subsidies.

martinborck: "We might upgrade our laptop computers less frequently"

Oh, please! American businesses and American consumers would source their laptop purchases from other low cost producers. The resulting very tiny difference in laptop cost would make no difference to those consumers who need software upgrades in order to increase productivity or to use increasingly complex applications.

That U.S. consumers can source laptop purchases from other producers doesn't change the fact that U.S. consumers would pay more with the subsidies.

Even if "a small difference" is true, "no difference" is clearly false. Just admit that.

Windows upgrades are not necessary to increase productivity or use increasingly complex applications. Many people hate upgrading their OS these days and do it only when a hardware upgrade makes an OS upgrade practically unavoidable. This experience is now so common that it's a cliche.

Sure, all fluffy, impossible to test and theoretically correct I am sure martin,

But on an purchase order/invoice no one cares about the exchange rate, nor should anyone care about it, as it is fictitious, it is also irrelevant.

JBP

I don't see taxes imposed on GM, or its subsidies or the effect of labor laws or manufacturing process regulations or anything similar, when I order a car either. Do these enactments have no effect on me? Are they fictitious and irrelevant?

But I can see an ostrich when his head is buried in the sand.

It is in the negotiated price with your dealer. A regulatory body can monkey with them all they want, but the price is negotiated between the sales guy and the customer.

If a sales guy says "this car has $1000 worth of regulatory fluff in it, but I am going to charge you $100" the net is $100 not $1000. How he makes up the difference between the two numbers is not really much concern to the customer, thus irrelevant.

JBP

I answer "yes": the policy is funneling money into the U.S. treasury market and making borrowing artificially cheap for the U.S. Government. This is bad for the American people because it shifts power over resources from the American people to the U.S. Government. Not a lot, but it does, and I don't think the insane benefits acruing to U.S. consumers from Chinese suffering makes up for this economic shift to D.C.

Lonesnark: "I don't think the insane benefits acruing to U.S. consumers from Chinese suffering makes up for this economic shift to D.C."

Our federal government is going to spend what we allow it to spend. If China did not buy U.S. Treasuries, those U.S. Treasuries would still be sold.

If interest rates are lower as a result of Chinese purchase of U.S. Treasury notes, who is benefitting? American businesses, for one, who realize lower interest expense. That means the cost to invest in capital equipment is lower than it otherwise would have been. How is that a bad thing, Lonesnark?

Please understand, I am not agreeing that Chinese purchases of treasuries are having a significant impact on interest rates. I'm just accepting that assertion for the sake of argument.

There wouldn't be such a need to finace U.S. debt if the federal government didn't spend like it does. The Chinese, or any other country for that matter, would purchase equities and properties if the U.S. Treasuries weren't there to purchase and if China wasn't willing to purchase U.S. goods and services in higher volumes.

But the Chinese government would never do anything to hurt their people would they? /snark

I'm confident that Muir and Dan can square this circle. How an over powered intrusive government consistently hurts rather than helps their own people.

I was thinking about commenting, but nowhere near what you expect me to say.

I was going to say that Don's point that a manipulated currency clearly hurts the Chinese. To the extent that anyone says it "helps" them it must implicitly be refering to something more specific: helps their exporters, for example. Because obviously it doesn't "help" on net. That is clear, unless you're Harold Meyerson or someone like that.

What I WAS thinking about asking is why Don seems to suggest that while currency manipulation hurts the Chinese on net, it helps Americans. Don often talks about how "we might as well enjoy the cheap Chinese goods", etc. etc. That is the side of his argument that I find hard to swallow, not the argument that it hurts the Chinese (which I think is fairly obvious).

Put it this way - if Don thinks that a weak yuan is good for the U.S., why doesn't he advocate the deliberate pursuit of a strong dollar?

If true, would that not be a Utilitarian approach? Don doesn't strike me as a Utilitarian. I could be wrong.

Well, it's a rhetorical strategy he uses a lot. If Krugman supports government provision of health care, Don asks "well then why don't you support government provision of food". I agree, it's not the most impressive way to make your argument - but if he really thinks a weak yuan is good for America is begs the question - why doesn't he openly support a deliberate strong dollar policy? One answer may be that he doesn't because he's not a utilitarian. But I think there are other reasons why he wouldn't support it too - and those other reasons get at my point that Don isn't correct to say that weak yuan is good for Americans and that Americans should just enjoy it.

So, not being utilitarian could be a response to your rhetorical strategy.

Another could be that Don, at least from what I can tell, doesn't "openly support a deliberate" weak yuan policy. He's just performing economic analysis by saying that China's policy. So asking why he doesn't openly support a strong dollar policy isn't fair. It seems to me you had very similar advice for somebody about a similar statement Krugman made, no?

Well - my point about Krugman is usually "health care is VERY different from food". Whereas I don't think you could argue that a weak yuan is very different from a strong dollar!

I'm not saying he can't consistently hold that position - but I am very curious about why he thinks controlling the price of the dollar is good for or helps Americans. Usually he's of the opinion that controlling prices hurts everyone.

Actually, I was thinking about the comment you had on Kling's site about something Krugman wrote around '03 on creating a housing bubble. Krugman said that wasn't advocacy, it was analysis. Seems to be the same here. I don't see Don advocating a weak yuan, just analyzing the consequences of it.

A strong dollar would help some and hurt others, but I don't see it as the same as a weak yuan. A weak yuan may not effect our trade with other countries the same way a strong dollar might.

we have a strong dollar - against the yuan. Currency strength is relative to a specific currency.

Right. The relative "strength" that matters is the difference between the price of yuan in dollars at the fixed rate and the price if the rate were not fixed.

China's monetary authority can only fix this price by selling yuan below the market price. It can't fix the price above the market price, because doing so requires that it continually buy yuan with dollars, and it must run out of dollars this way eventually, because it doesn't create dollars. China's increasing dollar reserve implies that the fixed exchange rate is below the market price.

If China's monetary authorities only bought real U.S. assets in the real market with these dollars, U.S. sellers of the assets could only benefit, but they don't buy real U.S. assets. They buy entitlement to U.S. tax revenue, and only our own government can sell it to them.

Creating these Treasury securities backed by forcible confiscation is not China's doing. It's our corporative state's doing. If China could only buy ever riskier mortgage backed securities with its increasing volume of dollars, without any implicit guarantee from taxpayers, this purchase couldn't hurt us.

So China finances my occupation of a home I can't afford for a while. Then I default. So what? I live in a house I can't afford for a while, then I move into one I can afford. How does that harm me? This sort of thing should (in a freer system) be the consequence of China's mercantilism.

So the problems (for us in the U.S.) with the current account deficit created by China's gift of free yuan to U.S. consumers is created by our government's sale of entitlement to tax revenue and other forcible guarantees of a "return" on China's "investment" of the dollars it accumulates by selling yuan below the market.

The other forcible guarantees, the ones we rarely discuss, frighten me even more, precisely because we don't discuss them and don't really understand their extent. These guarantees are things like international patents. Our own government is largely responsible for internationalizing patents and other forcible monopolies during the Reagan administration.

When China stops subsidizing exports, we'll need to retreat along the developmental trajectory we're on, by producing more of the goods that China now produces for us at subsidized prices, but we can't do that if our own government has passed laws against it, and it has.

The longer China's mercantilism persists, the worse this problem becomes, and because China is so much less developed (even now) and it's population is so much larger (and so captive), the policy can continue for a long time. We'll keep adjusting to it, but we'll adjust to it by moving further along a developmental trajectory that is unsustainable when the policy ends, and when our place on this trajectory becomes unsustainable, our own government will threaten to shoot us for trying to compete with China's production.

Assuming your reasoning is without flaw, you have to a minor degree vindicated my stance, unintentionally. Applauso. Thank you for pointing out that this currency-peg arrangement is essentially collusion between our government and China's, something which I have asserted many times and something which, as you indicate, changes the game entirely.

The arrangement between Beijing and Washington is essentially the same as Washington forcing American consumers to purchase Chinese goods which would, under free-market conditions, be less competitive or more expensive than American goods (do we not argue that higher wages mean higher productivity?), but because the governments force this currency peg, which continually requires Beijing to support the dollar, Chinese goods are artificially cheap and competitive with respect to American goods, driving out American manufacturing and benefiting the American service economy. Now, in reality, under a free market, Chinese goods aren't more competitive, but the respective governments have effectively made them so. No real capital is freed up as a result of this process, since in reality these "cheaper goods" represent capital squandered by government borrowing and forced purchasing of foreign goods, purchases that would normally represent a loss of capital and would normally be foregone instead for American products. Hence, this is not, in the long term, a mutually beneficial but a mutually destructive relationship, as the Chinese accrue greater American debts which may never be repaid and we experience an increasingly eroded manufacturing sector, which is our only hope of ever repaying this debt. It's basically malinvestment on a grand scale. The misallocation of resources can continue seemingly indefintely but of course must eventually come to an end. Other areas of the American economy experience an expansion in production or an increase in wages, such as the service sector, but this is a bubble phenomenon, an illusory and ultimately unsustainable development, while the manufacturing sector shrinks and our balance of payments skyrockets. Again, if the current account, trade deficit, etc., don't matter, then why not allow them to increase to several times GDP? What would it matter?

I would like to add/clarify, that, in my (quite possibly flawed view), there can't be any net capital increase or transfer to the United States as a result of this arrangement and that there must be mutual capital destruction. It's kind of akin to a bailout of sorts. It's like forcing someone to buy from the second-best competitor, except that competitor "benefits" because his sales are based on vendor-financing--a pyramid scheme, basically.

Government debt is bad for the people; so are government assets, for what are government assets but taxes paid by the market? Therefore, neither government assets nor government debts benefit the people, and therefore China and America are both shafted by their mutual arrangement.

Of course, "China" and "America" are collectivist categories. Some people in China and the United States benefit from these manipulations, but people on the average do not. Theft is a wondrously profitable innovation, if you're a successful thief.

This whole arrangement and others like it actually supports a crazy "cosmic" theory, if you will, that I have entertained for some time, and which may yet prove to be accurate. I sit and wait. Even those who SHOULD believe such a theory are likely disinclined to take it seriously, but then so was the case with Mises for so long, and still is.

"In it, I assume (for the sake of argument) that the Beijing government does in fact keep the Chinese yuan undervalued."

Is there a debate over whether it's being kept undervalued or not?

Whether or not there's widespread debate over this point it's worth noting the assumptions/presuppositions behind an argument. Assumptions and presuppositions are very often hidden or unstated and can lead to confusion later in a discussion.

Hence my question.