Kuta Beach

Kuta Beach

Monday, 4 October 2010

Chinese Currency Manipulation - What Can You Do?

Many in America are angry about the Chinese government devaluing its currency to make its exports more attractive to buyers. Whether or not this is ethical, I cannot see what in the world the US can do about this.

One solution is to impose sanctions, e.g. the US government could put a tariff on Chinese goods. The major problem with this idea is that the price of goods will go up. Chinese people are willing to work for very little, resulting in goods prices that are very low. Americans have minimum wage laws. Unless the American people are willing to give up minimum wage laws and work for a few dollars a month, prices will rise, which will hurt American consumers, and voters will be outraged by price rises. Some argue that although prices will rise, this will be compensated for because Americans will have more jobs. But price rises destroy jobs as well. Every dollar you spend creates jobs. If all of a sudden I purchased a coffee every day, someone needs to make that, so someone is hired to make that coffee for me. However, if I suddenly had to pay more for t-shirts because Chinese goods were banned, then I would have less money left over to buy other others, and I will cut back on e.g. coffee and this reduces demand for coffee thereby resulting in job destruction.

Another solution is for the American government to continue devaluing its currency by printing more and more US dollars. The Chinese government, however, can easily respond by printing its own currency.

One way the Chinese government maintains its currency peg is to buy US Treasury bonds. One suggestion is to ban the Chinese government from buying US Treasury bonds. This could be a problem the US government because the Chinese government is a major consumer of US debt. If the Chinese do not lend to the US, the US will lose a major customer. Currently the US government relies on Chinese lending to fund its various stimuluses, so what the US needs to do then to depreciate its currency is to stop its stimuluses and replace lose Chinese demand for US sovereign debt by selling Treasury bonds to US citizens, which means US citizens will need to suddenly become thrifty savers. I will let the reader decide whether that is likely to ever happen.

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