Economics: Krugman-China is the bad guy in the currency war


At least the Chinese chicks are the good gals

Blog Note: Not too many will argue with Krugman on anything. OK-on economics one can argue with Krugman-and obviously, there are hordes and hordes of people who do not agree with Krugman. But when it comes to morality, very few people will venture into an argument with Krugman. Currently, a currency war between China and much of the rest of the globe is on the verge of breaking out. Krugman sees that China is wrong. This issue is clearly a “Moral” issue. So stand-up all those with strong morality-and argue with Krugman.

  • The following is from the Credit Write-down blog:

The U.S. Senate will pass legislation geared to pressuring China to revalue its currency and the US is set to label China a currency manipulator. The view in Washington ahead of the mid-terms is that China is “the bad guy” as Paul Krugman explains in the video below.

Here is a synopsis of the Krugman position:

  • The Chinese have no intention of revaluing. Most moves they have made to date are cosmetic and done in a calculated fashion ahead of international meetings to deflect criticism.
  • “Emerging markets could be a help to the world economy.” The shortage of investment opportunities in the advanced economies and the abundance in the emerging markets means it is mutually beneficial to have capital flow to the emerging markets and “drive this recovery.”
  • We don’t know the RMB’s fair value. “The right way to judge is not the value of the renminbi” but rather the scale of currency intervention China must effect to keep its peg in place.
  • “The Chinese are playing with fire here.” If they act soon, we can have a reasonable workout. If they wait, protectionism is coming.
  • Tim Geithner has held the protectionists at bay but he will not always be the negotiating partner for China.
  • China should take the brunt of criticism despite the impact that talk of the Fed’s quantitative easing is having on the US currency.

My problem with tough rhetoric is that it tends to escalate a situation and lead to brinkmanship. Michael Pettis has a different message. Echoing a post from last week, in an op-ed in the FT he says “Do not overreact to China’s currency delays.” He believes changes will occur without brinkmanship.

The angry statements about currency manipulation continue, with anger focused on China’s renminbi. It is not the only country to intervene, but the scale of its action and the size of its trade surplus make it an obvious target. An excessive focus on the renminbi will soon make a bad situation worse, however, especially for China. As Premier Wen Jiabao’s testy statement last week in Europe revealed, for all its growth, China’s economy remains unbalanced and vulnerable to deterioration in its trade account…

Any solution will therefore require statesman-like behaviour, in which the major economies agree to resolve their trade imbalances over several years. But periods of global economic contraction and rising unemployment do not usually welcome statesmen. Sadly, it is much more likely that trade relations will continue to deteriorate, and the longer surplus countries drag their heels the more attitudes will harden. In that case, China’s overinvestment problem is certain to become even worse.

Meanwhile, the rhetoric by some in China has become a tad more shrill. Reuters reports.

“The dollar’s depreciation may appear to be market-driven. In reality, it is a depreciation colored by very strong, deliberate actions,” Li said in the paper, which serves as the chief mouthpiece of China’s ruling Communist Party.

The overseas edition of the People’s Daily is a smaller offshoot of the domestic edition.

Li said the Federal Reserve’s announcement that it might soon launch another round of quantitative easing by buying bonds and other financial assets had been the key factor pulling down the dollar.

The motives were plain enough, he said.

Without a weaker dollar, the United States would have no hope of meeting President Barack Obama’s goal to double exports in five years, Li said.

Dollar depreciation will also serve longer-term interests by generating inflation and easing the debt burden that the financial crisis dumped on the U.S. government.

Neither China nor the US has publicly recognized the other’s negotiating stance. Could all this all be political posturing for domestic constituencies on both sides? We’ll find out in due course.

Read more:


Currency War?

How about going to war for the following Chinese chick?