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October 14, 2010
The currency wars are here in the form of confrontations over exchange rates. More particularly, it is over China consistently accumulating large amounts of foreign reserves by running a trade surplus and intervening to buy up the dollars that this generated. In practice, this means efforts to prevent their currency from appreciating in value.
In terms of the governance of the global financial system the IMF is meant to pressure countries undervalued exchange rates to let their currencies appreciate. The IMF has no power over China, or any other country with a current-account surplus.
China is unwilling to sharply increase the value of its currency, or let it float on the open market, as more expensive exports would set off a chain reaction of factory closures and layoffs across the interconnected networks that drive China’s export-oriented economy. This in turn undermines economic growth and domestic stability, and by extension, the Communist Party's hold on political power.
However, Beijing simply does not accept that its undervalued exchange rate is a significant cause of global imbalances, and says that US current account and fiscal deficits are self-inflicted. In the US, the common view is that excess savings in Asia created the US current account deficit, and so the solution lies to the east. Hence the China bashing.
Hence the Congress getting up legislation to allow the President to slap tariffs on Chinese imports because China is “artificially” keeping its currency low relative to the dollar.
The currency row is an acceptable way to fight over imbalanced trade patterns. The global trading system we operate under isn’t free trade, it’s managed trade, and most other countries play the game in a way to produce better national outcomes (fewer lost jobs and trade surpluses). Every sovereign nation, the United States included, uses its vast arsenal of policies to pursue its national interest.
The world's only superpower is losing ground in global competition, and is becoming financially dependent on strategic rivals like China. The US a net debtor nation, faces the simultaneous existence of a sizable current account deficit and excessive unemployment with no relief in sight. Its economy is unable to produce the goods its citizens want to consume. The Chinese economy does.
If the US is to reduce it's trade deficit, that really means reducing its imports of manufactured goods. That ultimately also means increasing exports, but that will take a longer time to put into effect, assuming the US multinational vogue for offshoring can be partially reversed and the dollar devalues. Washington looks to be pursuing a weak dollar by the Federal Reserve keeping long-term interest rates so low global investors are heading elsewhere for high returns, which bids the dollar down.
On the other hand, the debt-strapped households of Middle America, or Britain and Spain, can no longer hold up their end of consuming cheap Asian exports. Unemployment remains high in the US. Robert Reich says:
Our jobs crisis is due to the collapse of demand in the U.S. after the housing bubble burst. No longer able to borrow against the rising value of their homes, the vast American middle and working class can no longer spend enough to keep the economy going. If Democrats (or Republicans, for that matter) want to blame something, blame America’s record level of inequality – an almost unprecedented concentration of income and wealth at the top, and a smaller proportion for the vast middle.
Even though high unemployment in America has little or nothing to do with China, the tendency in the US is to blame China. It is part of a backlash against free trade + immigration.
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The high dollar is hurting the US. here's the basic argument:
The US needs to weaken the dollar.