January 23, 2009

Geithner’s China-Baiting

I normally wouldn?t wag a finger at tax dodging? But it?s another story when the person in question?Tim Geithner?is a Fed president, bureaucrat, and Wall Street bailout impresario.

Anyway, Geithner made news today in his confirmation hearings by accusing China of ?manipulating? the renminbi. The RNB used to be on an official ?peg? to the dollar, but since 2005 it?s been in a ?managed float.? The Chinese state has definitely suppressed the RNB?s value in the last three years, but then it has appreciated against the dollar some 20 percent or so. (See graph here.)

The truth is, every currency on earth is ?manipulated? in the sense that every currency is fiat money, issued by a central bank that manages interest rates and increases and decreases the money supply at will. ?Currency manipulation? is what Geithner himself has been doing for the past five years at the New York Fed! The idea that the Chinese are any more sneaky and nefarious than everyone else is ridiculous. 

What Geithner is basically gesturing towards is this notion that the RNB is unnaturally weak against the dollar (which is true) and this thus gives China an unfair trade advantage because its products are cheap vis-?-vis American ones (which is not necessarily so). Geithner is basically hinting that China just needs to let the RNB rise?or perhaps he and Bernanke need to further weaken the greenback?and then American manufacturing will flourish once again.

But this is all bullshit. Throughout America?s manufacturing heyday?when we were exporting consumer goods all over the globe?the dollar was one of the world?s strongest currencies, and American workers were some of the highest paid. Even with all of Japan?s problems, they?ve maintained a similar situation to this day. Moreover, countries with very weak currencies, like Argentina, aren?t exporting their goods anywhere.

One?s intuitive sense that a strong economy has a strong currency is right. Geithner is, most likely, just participating in a little anti-China demagoguery so that once the dollar starts to crash, due to Bernanke?s money printing and all the coming bailouts, Geithner can say, ?Look we?re helping to rebuild American manufacturing!? 

Let?s also imagine for a moment what would happen if China stopped manipulating its currency?i.e. let it rise. Yes, Chinese products would become more expensive, but then the purchasing power held by each Chinese saver would go through the roof. Would the Chinese start ?buying American.? Of course not. They?d start buying their own products with their newly potent renmenbis. The arrangement of China as export producer and America as mass consuming engine is one that the Chinese will support while it suits their purposes?which probably isn?t for very much longer.

At the very least, I hope the Lou Dobbs/Buchanan crowd doesn?t take the bait and believe that we can save American industry by attacking China and wrecking the greenback. 

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