There Ain’t No Such Thing As Free Currency Manipulation

by Don Boudreaux on April 26, 2011

in Balance of Payments, Budget Issues, Debt and Deficits, Inflation, Seen and Unseen, Trade

Here’s a letter to Foreign Affairs:

Joseph Gagnon and Gary Hufbauer want Uncle Sam to tax incomes on Chinese holdings of U.S. financial assets (“Taxing China’s Assets,” April 25).  The goal is to punish the Chinese for devaluing the renminbi by buying lots of U.S. assets, especially U.S. treasuries.

Never mind that it would be gallingly hypocritical for Uncle Sam, who continues to borrow untold sums of money, to scold and punish a willing creditor.  Instead, recognize that any attempts by Beijing to devalue the renminbi unavoidably come with their own built-in punishing tax: inflation.  And as the New York Times reported a couple of weeks ago, China’s inflation rate is indeed now rising ominously.

Inflationary increases in the supply of renminbi might or might not be due to a decision by Beijing to keep the exchange rate of the renminbi artificially low.  But one thing’s for sure: the increased supply of renminbi necessary to carry out the alleged exchange-rate manipulation needs no further taxes or penalties from Uncle Sam in order for the Chinese to be taxed for their interference in the market; the resulting inflation in China performs that punitive function just fine.

Donald J. Boudreaux

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Methinks1776 April 26, 2011 at 1:11 pm
Martin Brock April 26, 2011 at 1:48 pm

The Chinese are clearly clever people.

… once the Fed is stuck as being the only buyer of US debt.

When did “U.S. debt” become synonymous with “U.S. government debt”? I’m still credit worthy. So are my children, as long as the leviathan doesn’t strangle them. All of us possess valuable resources with few obligations to anything but the leviathan.

Stone Glasgow April 27, 2011 at 1:37 am

The US government owns you. Additionally, any of its debts are also your debts, because you will pay them if it wants you to do so.

Martin Brock April 27, 2011 at 9:42 am

Well, I don’t have to like it.

Vance Armor April 26, 2011 at 1:14 pm

Here is something that Hayekians and Public Choicers should consider: A punitive moocher’s tax. Here’s the proposal, which I call “The Ayn Rand Memorial Tax on Millionaire Moochers.” It goes like this: A 40% surcharge on the total annual federal tax due by individuals and business entitities reporting a gross income of one million dollars or more IF AND ONLY IF such individuals and business entities report more than one hundred dollars in actual payments from any federal, state, municipal or foreign governmental source. Individuals and business entities that do not take from governmental sources will not be affected — lower THEIR taxes as much as possible. Turn the class warfare argument around and put the onus on the Progressives. A moocher’s tax would divert resources away from defense contractors and the other Keynesian pyramid builders, especially the “urban development” scam artists who regularly tax the poor in local sales taxes and redistribute for downtown projects. You want to end the Progressive Empire and restore the Constitutional Republic? Then punish the moochers.

Slappy McFee April 26, 2011 at 1:16 pm

Can anybody recommend an “inflation-for-Dummies” resource?

hayseed April 26, 2011 at 9:40 pm

Russ interviews Don on econotalk last year, they talk about inflation quite a bit.

Ron H. April 27, 2011 at 4:17 am
Martin Brock April 26, 2011 at 1:34 pm

Scolding and punishing Uncle Sam’s willing creditors is fine with me. Let’s tax Treasury interest and also enact a death penalty for all future creditors.

Devaluing a state monopoly currency like the renminbi creates malinvestment, and inflation within China (rising prices of yuan-denominated assets) can result; however, the malinvestment is not limited to the borders of China. Effects outside of China can take a different form, like an economy moving along an economic trajectory from which it ultimately must retreat.

An inflationary monetary policy within the United States has a similar effect, as when entrepreneurs organize too many resources to build too many houses for sale to too many buyers who can’t really afford the houses.

We discuss the perils of state money within the United States in this forum. We should also discuss the perils of state money elsewhere, particularly since our statesmen often are cozier with other statesmen than with us.

Sure, if “we” didn’t sell “them” the Treasury bonds, “they” couldn’t buy “our” bonds. Problem is: I am not really one of “us” or one of “them”. I’m only one of the minions on whom my statesmen impose the taxes fueling “their” demand for my bondage.

Don’t try to persuade me that I properly owe anyone a single time of principal or interest on any Treasury security ever sold. I’m not buying the first word of it. I’ll vote for the first politician who credibly promises to default on the whole pile.

rhhardin April 26, 2011 at 2:49 pm

You owe on Treasury obligations because selling Treasuries reduced your taxes. That’s what running a deficit means.

Methinks1776 April 26, 2011 at 2:52 pm

Actually, it didn’t reduce his tax. It increased his tax. It did reduce his own borrowing costs, though.

Methinks1776 April 26, 2011 at 2:57 pm

Because I made that clear as mud…incremental Chinese demand drove down borrowing costs not only for Uncle Sam but for you as well.

Martin Brock April 26, 2011 at 7:17 pm

I owe on Treasuries, because men with guns will confiscate my wealth if I don’t pay, and if I resist the confiscation, they’ll lock me in a cage, and if I resist the caging, they’ll shoot me. I similarly owe my wallet to any mugger with a gun to my head .

Everyday Anarchist April 26, 2011 at 4:52 pm

Why bother with complicated taxes and regulations on creditors? Just default and be done with it.

vikingvista April 27, 2011 at 11:50 pm

Hear hear. Would be very beneficial negative reinforcement on any future prospective Federal government creditors. Except the Central Bank, of course. It will always be there to buy whatever debt the Treasury wants to sell. It is the reason for massive government growth, and therefore the single greatest modern threat to liberty.

rhhardin April 26, 2011 at 2:51 pm

I don’t understand US inflation, except perhaps as a result of unwillingness or inability to produce (so that even slow moving dollars bid up prices on a reduced economy). The dollars aren’t flooding anywhere but to mattresses, as far as I know.

vikingvista April 28, 2011 at 12:51 am

“The dollars aren’t flooding anywhere but to mattresses, as far as I know.”

It’s always a matter of where and when.

Creating and spending new fiat money always increases prices somewhere to higher than they otherwise would’ve been. It must, because it is adding demand to whatever it is purchasing, or increasing value to whatever it is gifting.

E.g., The Fed bids down Treasury rates. Federal Reserve member bank shares go up relative to where they would’ve been when the Fed buys their assets.

The initial recipients then use that money themselves. Governments buy government contractor services, bidding up their prices, and pay government employees. Banks hire or continue paying salaries and bonuses. The wave of demand and price increases spreads. Those who get the money will out bid those who don’t. Thus, there is a redistribution of resources toward the central bank.

But once spent, the inflation cat is out of the bag. There is no string to pull back in those dollars. The inflation wave leaves already-adjusted prices in its wake. The central bank has no interest in driving down bank share prices to what they would’ve been, or creating a fiscal crisis for the Federal government. You can’t undo monetary inflation with monetary deflation any more than you can fix a third degree heat burn with liquid nitrogen.

The crime of inflation isn’t that all prices wind up higher– that wouldn’t make hardly any difference. The crime of inflation, is everything that happens between the creation of the money, and the time all prices have adjusted.

And it can’t be fixed or reversed. All that can be done, is to not do it again.

W.E. Heasley April 26, 2011 at 3:01 pm

“Today, in the midst of prolonged economic weakness, with the U.S. trade deficit rising and unemployment persistently high — and Chinese-owned U.S. debt probably exceeding $2 trillion — legislative pressure is again growing to raise trade barriers against Chinese goods.”

“The United States clearly needs to ratchet up the pressure on China, and the next installment of the U.S.-China Strategic and Economic Dialogue, scheduled for early May in Washington, provides a natural opportunity.”

“And major trade measures, such as a tariff or quota against all Chinese exports, would likely be ruled illegal by the World Trade Organization and would almost certainly provoke Chinese retaliation against U.S. exporters. Moreover, a trade war across the Pacific would quickly create vested interests among protected U.S. and Chinese industries, making the retaliatory measures hard to unwind. For these reasons, it is no surprise that U.S. policymakers have been reluctant to launch a trade war with China; officials in Beijing understand this reluctance well and, accordingly, have viewed U.S. threats as bluffs.”

“A more productive course would be to tax Chinese currency manipulation rather than Chinese exports.” – Joseph Gagnon and Gary Hufbauer

Very nice! Gagnon and Hufbauer have been busy have they not?!? “One novel option” as the summary points out. Right. Uh huh. Sure.

Can’t wait for their book:

Protectionism My Way, why your economic woes are always someone else’s fault, your gateway to the 1930’s.

simon... April 26, 2011 at 3:15 pm

I love this idea! I’m calling my mortgage lender now to DEMAND payment for a privilege to lend me money!

Everyday Anarchist April 26, 2011 at 4:50 pm

This would be like going to your bank and demanding a portion of the interest they earn on your mortgage payments!

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