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Too Loose! No, Wait: Too Tight!… No, Wait Again: Too Loose!….
Posted By Don Boudreaux On January 21, 2011 @ 12:03 pm In Balance of Payments,Inflation,Markets in Everything,Trade | Comments Disabled
Here’s a letter to the New York Times:
Paul Krugman argues that the Chinese yuan is undervalued (“China Goes to Nixon ,” Jan. 21). In paragraph four he explains why: “The root cause of China’s muddle is its weak-currency policy, which is feeding an artificially large trade surplus.”
In short, Beijing keeps the value of the yuan too low by buying dollars with newly created yuan – a policy that Mr. Krugman correctly recognizes to be inflationary.
But as we read on to paragraph ten, we find Mr. Krugman singing an altogether different dirge. He there complains that Beijing now is “trying to control inflation by raising interest rates and restricting credit. This is destructive from a global point of view: with much of the world economy still depressed, the last thing we need is major players pursuing tight-money policies.”
If the “root cause” of the low value of the yuan is Beijing’s inflationary monetary policy – and if this policy harms, as Mr. Krugman says, both China and the rest of the world – why does Mr. Krugman scold Beijing for tightening its monetary policy?
Donald J. Boudreaux
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 China Goes to Nixon: http://www.nytimes.com/2011/01/21/opinion/21krugman.html?ref=opinion
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