Here’s the second installment in my series, appearing in the Pittsburgh Tribune-Review, arguing that Americans should not worry if the value of other countries’ currencies are "too low." The following paragraphs are excerpted from the middle of my column:
Keeping in mind that it is difficult to determine whether or not a
government truly is keeping the value of its currency too low relative
to the dollar, let’s assume (for argument’s sake) that the Chinese
government really is doing so.
How does it achieve this outcome? Answer: The Chinese
government must buy up dollars and keep them out of circulation. By
reducing the supply of dollars on foreign-exchange markets, the value
of the dollar rises relative to other currencies, including that of the
Chinese yuan.
In other words, the value of the yuan falls against the dollar.
Now ask: How does the Chinese government buy these dollars? It
can do so only by taxing its citizens, either directly (such as by
raising their income taxes) or indirectly through inflation — simply
printing new yuan — or deficit financing. Each of these policies
transfers money from the pockets of Chinese citizens to the coffers of
the Chinese government. This government then uses these yuan to buy up
dollars.
The ultimate result is that the Chinese government forces
Chinese citizens to subsidize the consumption of Americans and other
peoples who import goods from China. The Chinese people either pay
higher taxes or suffer inflation so that Chinese exporters can sell
goods to foreigners at artificially low prices.
Why should Americans complain? The real victims of such currency manipulation are the Chinese people. Americans are beneficiaries.
