So what’s the deal with “currency manipulation” anyway? Recent political debate has warned against the dastardly dangers of China’s “unfair trade practices” and demanded that heavy import duties be slapped on Chinese goods. What’s up, what’s down; what’s good, what’s evil?
It’s true that China has significantly and artificially debased the value of its currency, the RenMinBi (denominated in yuan), stocking up on massive amounts of foreign-exchange reserves (usually US Dollars and US Treasures) and flooding the market with ever-cheapening yuan. It’s also clear that China has done so with the aim of increasing its exports: when currency is less valuable, each unit of foreign currency purchases more units of domestic currency, exports become “cheaper” for foreigners and more widely bought, and domestic manufacturing jobs increase. Or so the logic goes.
China’s unfortunate economic logic – which directs it to purposefully devalue its own currency, pouring funds into an growing pile of foreign debt – endangers nobody but its own citizens. Economically misguided Chinese policy-makers, seeking more exports and a higher GDP, devalue the yuan. The American consumer, holding a strengthened dollar, can purchase ever-the-more Chinese goods; the Chinese entrepreneur, facing a devalued yuan, may afford less on the international scene. China’s augmented exports are achieved by subsidizing the American importer at the expense of the Chinese exporter.
I hypothesize that modern blind over-reliance on GDP has inappropriately directed policy goals towards export-maximization – just because exports are produced domestically and imports are not. And here’s the kicker: those who demand redress for supposed “injuries” caused by foreign-currency depreciation make the mistake of devoutly seeking exports – even if those exports are sold at a loss. This mistake leads some economists to wildly contradictory conclusions. Incensed by forgone potential exports, many have called for an end to China’s purchases of US Debt – even though the deep deficit spending enjoyed (and praised) by many of these economists has been financed by nothing other than Chinese debt-purchases. A debt sell-off by the Chinese would increase Treasury rates and increase borrowing costs, further calling US solvency into question; more selling could ensue in a run on US debt. The US Treasury bubble could burst.
We may thank the stars that the Chinese have been kind enough to finance our consumption for the past 30 years. Hopefully – for their own sake – they’ll wise up soon.