Here’s a letter that I sent today to the New York Times:
Paul Krugman writes that “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” (“Taking On China,” March 15).
In other words, Prof. Krugman believes that it would be a good thing if Americans’ purchasing power falls along with the value of what we receive in return for what we sell.
To prove to skeptics the brilliance of his economics, Prof. Krugman can personally demonstrate why his plan is so splendid. He can petition Uncle Sam to do two things: (1) replace half of Prof. Krugman’s portfolio with Monopoly money, and (2) force Prof. Krugman to reduce his salary and his speaking, writing, and consulting fees by 90 percent.
Prof. Krugman’s purchasing power would, of course, fall, what with merchants not being very keen on accepting Monopoly money. But no worries, because Prof. Krugman’s “goods” – his lectures, his consulting skills, his books, and the like – would all become more “competitive.” Universities, newspapers, and other institutions that cannot now afford to purchase Mr. Krugman’s pricey services will, under this plan for his betterment, be better able to do so.
How much wealthier he will be!
Sincerely,
Donald J. Boudreaux
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To extend Mr Boudreaux's thinking to the Chinese, they should raise their currency several multiples. Of course there might not be many that can afford their pricey goods, but the Chinese left with jobs and money would have tremendous purchasing power. The Chinese need to hire Mr Boudreaux ASAP.
This is too much. Our 'progressive' president is determined to increase exports by two fold. So, naturally, here comes the president's loudest cheerleader/economist to write everything he can scare up support for policies that would do just that. No need to discuss the costs of such policies when one guns for the emotional appeal of economic stupidy.
Don, not that I've read any Krugman, but I'm sure that in his earlier work(s) on trade — when he was for free(er) trade — there must be something you can dig up to show his contradictions. And I can only imagine what this guy will be writing within this decade when we have a populist Republican president who extolls the very same emotional economic stupidy that the Left is extolling at this moment; more flip-flopping from the Krug is my guess.
Fantastic. That man is a Nobel Prize?. Impressive!
I hear around here that Chinese monetary authorities buying dollars and dollar denominated securities, particularly entitlement to U.S. tax revenue, by selling their currency cheap, presumably to buy market share in foreign markets, aren't really affecting markets at all. So if the same authorities sell dollar denominated securities and buy something else with the dollars, why would this new policy affect markets?
To be clear, Chinese currency manipulation is problematic only because American statesmen cooperate with it by forcibly imposing rents on American citizens and selling entitlement to the rents to Chinese statesmen. Without these forcibly imposed rents, the Chinese could only buy resources that Americans freely sell and could only extend credit to willing borrowers, as opposed to taxpayers compelled to repay the borrowing of their fascistic rulers.
But American statesmen do impose the rents, Treasury securities being only the tip of the rentiers' iceberg. Chinese statesmen do buy entitlement to the rents by accumulating dollars through mercantilist currency manipulation. That's all a matter of public record.
Do I care if the Chinese dump their Treasuries? Not at all. I'd like long Treasuries trading at 500% per annum, maybe 100% for the three month bills. Then I want Congress to declare bankruptcy rather than raise the necessary taxes, maybe after a few Congressmen hang by their heels along E. Capitol St. The sooner the better.
The idea that the interest rate on the mortgage on my house (if I had one) must rise along with the Treasury rates is economic nonsense. Unlike the Congress, I haven't destroyed my credit, and people dumping Treasuries still want to extend credit, so my interest rate might just as well fall, as long as I'm not compelled to borrow in dollars.
No, I'm not holding my breath, but a guy can dream.
You do realize that that's what Krugman suggested, right?
If Mr Boudreaux was advising the Chinese what policies do you think he would encourage them to pursue?
This is very true. The reason why China was able to enter and follow us in industrilization is because of its market price. Of course when we compare the Chinese currency with the US Dollars, their values are no where near ours. In fact, 1 US dollar, as of today, is 6.83 yuan; however, China is one of the 3 richest nations. Before, China was not even considered to be a rich country. Due to its population exceeding 1 billion, the country was not doing so well economically. But ever since it enters the world market with its incredibly cheap price, it's slowly creeping up the list of the wealthiest countries in the world. Right now, it's in the top 3 richest countries in the world along with the US and Russia. As we all know, the reason that Russia is on the list is only because its oil and because it left OPEC. China made it all the way up there not by natural sources but mostly through international market. Everywhere you go, you will see a product that's made in China. The same as in the situation with Prof. Krugman, more people can afford Chinese products because they are cheap. In the end, even though they don't make as much profit from each unit of product, they still earn more money than most countries. This is due to many factors but definitely the biggest factor is cheap labor. This might seems strange to some economists, but labor unions are what hurting us. They demanded high wages, benefits and good working condition. This made producers go to foreign country for cheap labor. That's why our products cannot compete with others in terms of pricing. What Prof. Krugman is trying to say is obvious in today market but in a much smaller scale. For example, when you open business, if you lower your price, even though you earn less profit per unit of product, overall, you have more customers. In the end, you actually make more money. If it works in a small scale, why not do it for a larger scale? I totally agree with Krugman. We need more economists like this in our country, who can see the far future instead of just the profit right in front of our eyes.
Don,
PLEASE assemble some of your favorite letters-to-the-editor into a book. Self-publish if you must.
Aaron
I don't understand what you are trying to get at. The Chinese government doesn't directly specify the price of the RMB. What they are currently doing is lending money to the USA (the Chinese govt either taxes this money or prints it). Prof Boudreaux is saying that's foolish; they should let the market clear naturally, and earn as much as they can from their output. Obviously, they don't want to artificially over-value it either (however they may do it) because that wouldn't be profit maximizing either.
Funny how Prof Krugman wrote a whole book (Pop Internationalism) where he goes on loops mocking those who use terms such as competitiveness in a discussion of international trade. Yet, now he writes for the laymen, he can't help himself.
I'm pretty sure he'd tell the central bank to let the RMB price be determined by the market. It wouldn't surprise me he would abolish the Chinese central bank either.
(or at least allow competitive currencies.)
Let's assume that Paul Krugman's thesis is correct: that China is in fact buying US dollars and manipulating the value of its own currency. This would mean then that thanks to Chinese taxpayers, American consumers have more money to purchase goods and services as a result of the more valuable dollar — Chinese workers are subsidizing our own consumption. Sounds to me like it is the Chinese taxpayers who should be upset about the situation, not American citizens.
This must have been posted before our favorite Krugmanista could log on and tell us what Krugman was actually thinking. I'll be racing home tomorrow to find out The Truth.
If the dollar falls, imports and foreign vacations are more expensive, and so my salary now buys less, making me worse off. Some folk are helped though – those selling their products overseas, for example. It seems that every time you criticize Krugman over trade, or anyone over trade, it comes down to your focus being on all of us (consumer surplus), and their viewpoint being instead focused on the few affected businesses (producer surplus).
It seems like there is both a change in consumer and producer surplus, but you always assume consumer surplus is larger for these changes. Is that a fair statement, or am I missing something?
Some folk are helped though – those selling their products overseas, for example.
Are they actually helped? I think you need to follow that claim through to its conclusion.
First off, think about the theoretical position. The ability to sell more product overseas is of limited value. You're selling the same amount, but the currency you get back is worth less. Your employees can afford fewer imported goods with it, your company can buy less raw materials and imported capital goods. Domestic consumers will have less available cash to spend on your product.
Higher prices on imported goods will translate directly to increased costs of production, except in the rare case that you make a product that is produced mostly domestically.
In fact, I think the profit-maximizing position is to raise overseas prices — you're going to need that money to cover the additional costs of doing business with a weakened currency.
The only upside is that a foreign investor might come in and try to snap you up at a bargain price, like the Japanese did (and continue to do) to our companies and real estate. Yay?
Second, consider the historical perspective. Has *any* nation with a persistently weak currency also been an economic powerhouse? You might say China, but by international standards, China is barely industrialized — their per capita numbers in all major areas are terrible. Infant mortality the same as North Korea, 108th in the world in life expectancy. Measured per capita, they barely have their nostrils above water.
Indeed, economic maturity and parity with 1st-world nations is what brings strength to currency; the belief that currency will be able to buy durable goods of value, the fact that investments in the nation are stable and growing, and that the nation will live up to its debt obligations.
RR
But ever since it enters the world market with its incredibly cheap price, it's slowly creeping up the list of the wealthiest countries in the world.
Fallacy. Per capita is the only thing that matters from a wealth measurement standpoint.
2008 GDP per capita in China was $3240, compared to $41K for the US. You could just as easily compare China to the EU; the EU has a GDP per capita of about $30K.
With a “purchasing power” comparison (that is, comparing the cost of a basket of products that a Chinese citizen might purchase versus a similar basket in the US), their GDP per capita might come up to $9000, still far behind.
Which is not to say we shouldn't recognize their potential and treat them with respect; in 25-40 years, if they avoid any major strife they probably will be in first world parity. That's about how long Japan and S. Korea took.
Dorking with the value of the currency is *hurting* them, by making their products priced lower abroad. Essentially, they're giving us stuff for free, and failing to maximize their own profit as a result. It's an idiotic policy for them, and good for everybody else. We shouldn't be criticizing them, we should be *thanking* them.
They're making crappy kitchen utensils and terrible motor scooters and low-margin stuff we wouldn't touch with a 10-foot clown pole, while we're making medication pumps and network routers and CPUs and diesel engines and…
I said, “You're selling the same amount, but the currency you get back is worth less.” — oops. I meant to say “You're selling more…”
nope. there are more than 2 currencies in the world, David. Driving the dollar down by selling it, says bugger all about the value of the yuan vs yen, euro, swiss franc, AUD, rouble, rand, real, etc…
the yuan could even be falling against these if they print & sell also some extra yuan.
But, as Martinbrock already said below, if the chinese dump their treasuries now, the US banks & government are insolvent before the day ends.
Paul Krugman really is a joke and an especially bad one at that.
Calling Krugman an economist is like calling Olbermann a journalist.
You don't believe that the value of the Yuan would increase against anything other than the US dollar if the Chinese decided to liquidate their US reserves? What do you think they might ask for in exchange for USD? If they started buying Yuan, as would make sense if they wanted to decrease foreign reserves, would that not drive the price of the Yuan up substantially?
And to be more clear, I've taken this paragraph right out of the linked Krugman piece:
“To give you a sense of the problem: 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.”
So, if selling the Yuan kept its currency weak against more than the USD, why would buying it back only increase the Yuan's value against the dollar? I think you could learn something from Krugman.
what I believe would happen if if if, doesn't matter.
You asserted that a lower dollar equals a higher yuan, and that simply need not be the case.
And I agree that I could learn something from Krugman.
I didn't assert that. I asserted that the policy Krugman advocated would lead to a higher-valued Yuan. That is what Krugman wants, though his interpretation of the results is focused around the US. What would happen if China sold only its US reserves is the value of the USD would drop dramatically compared to all other currencies and the value of the Yuan would do the reverse unless they bought some other foreign currency instead of their own.
“For example, when you open business, if you lower your price, even though you earn less profit per unit of product, overall, you have more customers. In the end, you actually make more money. If it works in a small scale, why not do it for a larger scale?”
________________
There are many bankrupt businessmen that can attest to the fallacy of that line of thinking.
“unless they bought some other foreign currency instead of their own.”
at last we agree on that.
But I don't agree that Krugman wants or expects the chinese to swap USD for yuan. He'd expect them to swap USD for other currencies, like he said two days ago :
http://krugman.blogs.nytimes.com/2010/03/14/isr...
How would that benefit China?
Krugman does not specify what currencies they should be shifting to in that article. That's probably because he's talking about what he wants to happen to the US, which would happen no matter what currency they switch to. However, if Krugman thinks that weak Yuan policies are hurting the world economy, as he surely does, then would he not prefer China buy back its Yuan? This would undo China's currency manipulation that he is so bothered by. This policy would, in Krugman's view, also help the US.
Professor Krugman definitely rights when he illustrated his plan. The most important reason that can explain for this statement is lower the price of your products as much as you can. When you are in a competitive market and you own a business, if you lower the price of your products than other firms, your products will become more competitive and you, of course, will have more customers. As a result, you will earn more profits as long as the prices for each unit you sell have to larger than the cost for unit of your products you buy.
You mean that if you lower your price to zero, you won't make infinite money?
You mean that if you lower your price to zero, you won't make infinite money?
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