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There Ain’t No Such Thing As Free Currency Manipulation

Posted By Don Boudreaux On April 26, 2011 @ 12:47 pm In Balance of Payments,Budget Issues,Debt and Deficits,Inflation,Seen and Unseen,Trade | Comments Disabled

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 [1],” 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 [2].

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.

Sincerely,
Donald J. Boudreaux

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URLs in this post:

[1] Taxing China’s Assets: http://www.foreignaffairs.com/articles/67810/joseph-gagnon-and-gary-hufbauer/taxing-chinas-assets

[2] China’s inflation rate is indeed now rising ominously: http://www.nytimes.com/2011/04/18/business/global/18yuan.html?_r=1

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