The Chinese Disconnect ( By PAUL KRUGMAN)

[dtotire]

By PAUL KRUGMAN
Published: October 22, 2009



Senior monetary officials usually talk in code. So when Ben Bernanke, the Federal Reserve chairman, spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.
But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.

Some background: The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.


There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. In fact, the system served China well during the Asian financial crisis of the late 1990s. The crucial question, however, is whether the target value of the yuan is reasonable.

Until around 2001, you could argue that it was: China’s overall trade position wasn’t too far out of balance. From then onward, however, the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre. First of all, the dollar slid in value, especially against the euro, so that by keeping the yuan/dollar rate fixed, Chinese officials were, in effect, devaluing their currency against everyone else’s. Meanwhile, productivity in China’s export industries soared; combined with the de facto devaluation, this made Chinese goods extremely cheap on world markets.

The result was a huge Chinese trade surplus. If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.

So what are we going to do?

[dtotire]

1. So what are we going to do?

Good question.

[snagglepuss]

2. +1

[Warpy]

3. We're going to do just what we're doing

We've lost our jobs or are afraid of losing them. If we're lucky, we've got a patchwork of part time, dead end jobs that will tide us over until Congress realizes they sold the country out and does something to get it back. If we're not, we're wondering how long it will take before we have to hit the streets, hope the tent holds up.

Our credit has dried up and we can't take any equity out of the house, it's all gone too. We can't sell it for what we owe, forget making a little profit to tide us over.

So we're not spending on anything we don't absolutely need.

China has robbed jobs from the whole planet and done so very quickly. Now they're finding out that wasn't a great idea since they depended on well paid workers elsewhere to buy Chinese made goods. Since they have the same wealth distribution problem other capitalist countries have, their own population can't afford these things, especially the population outside the big city centers.

You can rob the peasants only so long, and you end up with peasants incapable of supporting your lifestyle. Sometimes the peasants even rise up and remove your heads.

Owners and rulers still never learn.

[Peace Patriot]

4. Back before Rumsfeld was ousted, when a U.S. nuking of Iran seemed imminent,

I read a very short news article--which, to my very great regret, I did not save--which said that China, Russia and India were going to hold a meeting on how to curtail U.S. aggression. I don't recall the news source. I think it was in Asia. And there was zero follow-up by any other news source.

When the nuking of Iran got put "off the table" (in my opinion, in exchange for immunity from impeachment/prosecution for the Bush Junta principles, which is how holding them accountable for their many crimes also got put "off the table"), I thought of this short news bit, and the probable realities that the military brass, players like Leon Panetta (long time CIA, in my opinion), Daddy Bush (who had Panetta as a member of his Iraq Study Group), and various high-placed politicos and corpos, were facing, when they ousted Rumsfeld and called off Oil War Part 2. For one thing, they may have had three nuclear powers arrayed against the U.S. on Iran's side. But how else could China, Russia and India curtail the U.S. bully? Krugman's article makes me think they had a Plan B, or rather, a further plan, in addition to making the threat of retaliation known to U.S. powers. And this plan is financial, having to do with stripping the U.S. of the ability to invade more countries, via financial manipulations.

We shouldn't underestimate the Bushwhacks' own intention to strip the U.S. bare--by looting everything in sight, as well as by implementing financial policies so mind-boggling bad as to amount to treason. I've little doubt that they could and would ruin the U.S. all on their own. But perhaps they've had a little help? The goal being safety, security and world peace, with no U.S. Hitlerian war machine just waiting for the next Hitler to be Diebolded into office? Forcing the U.S. political/economic establishment to get rid of the Bush Junta may not have been enough of a guarantee of world peace. A broken U.S. economy would add another strong rope to tie down the giant.