The sooner, the better. I agree with him (again.) http://story.news.yahoo.com/news?tmpl=story&cid=568&e=3&u=/nm/20050421/bs_nm/economy_greenspan_dc
To say my knowledge of this topic is at the ignorance level would be an understatement. Roel, could you or others explain in simpler terms what this all means? I am confused as to why this issue gives China a trade advantage (amongst other things)? Thank you Andy
Basically, it is anti-free market for one of our largest trading partners to have an artificially rigged foreign exchange rate. It makes Chinese made products more competitive relative to US made products. The Chinese are using their current account surplus to secure more off-shore energy supplies, as well as US$ based assets. Much like in the 1980s when the Japanese were acquiring US assets (Pebble Beach golf club, Rockefeller Center, etc) and US debt (mostly T-bills) the Chinese are now in a situation to do the same. Chinese as our landlords and creditors probably is not in our national interest. In consideration of that, we need to develop our urban enterprise zones for more manufacturing capabilities. With a higher-pegged or floated yuan, the Chinese good will be relatively less competitive than locally produced US products, particularly when rising transportation costs are taken into account. with a combination of good US fiscal policy, a floating yuan and continuation or expansion of the enterprise zones, we could see a resurgence of US manufacturing in about five years.
I'll start off by saying I am a free marketeer. But I believe de-pegging the currency right now would bring the global economy to a screeching halt. Every other Asian economy that de-pegged their currencies in the '80s and '90s faced near financial meltdown. Japan still hasn't fully recovered. The world economy cannot handle such a major player facing a sudden stop. The only way to handle this situation would be gradual adjustments to the price at which the yuan is pegged. Then, in 7-10 years, we can have a floating currency. Also, assuming the yuan is able to maintain stability if it is indeed de-pegged, we would face a major crisis of inflation. We import far too many goods from China right now, and if those goods were to become more expensive over night, where would that leave the American consumer? This would lead not only to stagflation here, but also extend to China who would then be dealing with rapidly rising inflation and unemployed workers. For all the Democrats arguments against free markets, you sure are quick to jump whole heartedly into this debate. Our own free market didn't happen overnight, so lets move this issue forward gradually. May we not forget, China is still very much a Communist country. And while they have instituted some market-based reforms, they may be reversed in an instant. A free Chinese market will not happen until Democracy has been instituted there. So patience is key here. A rapid revaluation would send an irreversible shock wave through the global economy, so gradual steps are the best way forward.
Leave politics in the politics forum. Having said that, I'm inclined to agree with your assessment on the economic impact of make a sudden shift. We didn't get to this point over night, we're certainly not going to fix it overnight. I would love to see a resurgency of manufacturing in this country for no other reason than to slow the growth of the service sector. We're already at or over 80% for the service sector. This doesn't bode well of for a strong middleclass.
This is like that old joke: First guy: My brother thinks he's a chicken. Second guy: Have you taken him to a psychiatrist? I'm sure he can be cured. First guy: I would, but I can sure use the eggs! Wingtips, I disagree with you on the timeline and call for patience. I think the problem is urgent. Your concerns about inflation show that you aren't really into free markets and competition, only when it you think it suits you. Plenty of non-democracic countries float their currencies. If we ease out of the rigged exchange rate, then the current account deficit will not be fixed. And like all good free marketeers believe, bubbles were made to be burst. I don't suggest going all the way in one play, as markets tend to over-shoot the market, but aggressive steps would allow the US to re-develop its manufacturing base, especially in urban areas. Also, democracy and market-driven foreign exchange rates have nothing to do with each other, except that it makes for a convenient excuse for inaction. Either we apply pressure, so that we can protect our best interests, or we become their bitches. PS. I'm not a Democrat, although plenty of Democrats are free marketeers. And like Pathogen said, this is a non-partisan forum.
it is not a case of me picking where I think free markets suit me. my concern is sending a meltdown through a world economy that is teetering on knifes edge right now. I want a floated yuan, but realize it cannot happen overnight. And in terms of manufacturing, there is no direct relationship showing those jobs will come back. Companies won't shutter their shops in asia and return them to the US, especially if the products are staying overseas (see UTX and GE as examples). assume a chinese worker makes $60/wk. if yuan is revalued 200% (which is ridiculous), that chinese worker will still only cost $180/wk. Still cheaper for the job to be overseas, even when transportation cost is considered. Besides, many of the jobs that we have 'lost' overseas, are serving overseas markets. if we were to re-employ those jobs here, it would only make our products less competitive abroad.
With regards to re-establishing US manufacturing capabilities, I'm not looking back at "lost" jobs, I'm looking forward to jobs that produce locally consumed goods. Think of the local farmers' market, but with regards to the small-scale stuff one would buy from Wal-Mart, such as kitchen appliances, towels, bed linens, clothing and so on, rather than US-made cars or TVs sold in Venezuela or India. Also, wouldn't a meltdown of the Chinese economy (if it is so deserved by free market standards) create a series of new opportunities? Why do we give those opportunities to the Chinese to continue to repress their population / labor force in exchange for subsidizing artificially low prices at Wal-Mart. This doesn't make sense, and not only by free market criteria.
As to your first point, inflation would become a major factor in those types of products. the american consumer doesn't want to pay more $ for a comparable product, and they certainly stopped discriminating about US vs foreign made goods. second point well taken. china is working its way to a free market. it will take time. the us didn't become an open market overnight, for if it had it would have meant an inabsorbable change. some patience will go a long way, just as it has here at home.
So it comes down to this: How many US$ assets are Americans willing to give up to keep Wal-Mart prices artificially low? My answer would be zero, and let's get to FX parity as quickly as possible. That answer is both best of US interests and most consistent with free market principles. You are right, though. Most Americans and American politicians are not willing to do what is best in the long term, as it might cause some short term instability. Be that as it may, let's be truthful and admit that Americans and American politicians will pay lip service to "free markets," but will not do what it takes to get there. NB: I've had similar discussions with regards to petroleum imports and interest rates. At least three major portions of our economy (debt, energy and Chinese trade) are rigged, meaning they are not free for the market to set prices. Edited to add: The federal reserve is ratcheting up interest rates to their correct levels. This is rational, but having the US central bank establish the interest rate is hardly "free market."
1. The Fed isn't a central bank in the traditional sense of the word. ii. The Fed only sets one major interest rate. Other interest rates float more freely (credit cards, auto financing) which are tied to the "prime rate" only the loosest sense of the word. Mortgage rates are tied to the 10-yr. T-bill, which is why mortgage rates have increased more slowly than the overnight rate. Sachin
You are correct Sachin, but I think you underestimate the power of the Fed. Most of the time, all the other interest rates follow the Fed's recommendations, so there's some power there. I think, though, that the Fed's big power is the ability to shrink and grow the money supply. That doesn't tend to affect exchange rates, though, but rather more the internal economy.
Did anyone else notice the blip last Friday when China accidently (or purpusefully?) floated the Yuan for 20 minutes? If you didn't, I would recommend checking it out in your favorite finance/currency resource. It scared the bejesus out of a lot of people, cause the dollar fell like a rock. Here's what the NY Times said about it http://www.nytimes.com/2005/04/30/business/worldbusiness/30yuan.html?oref=login Thank goodness I have some gold, oil, and unhedged foreign currencies to fall back on. Yikes! Cheers, Tim