Friday, March 19, 2010

This Myth Makes No Sense

Have you ever walked into your boss's office and demanded a decrease in salary? If so, you probably left work that day, smiling from your successful negotiation, and stopped off at the steakhouse where you insisted they accept $60 for a $40 steak... More on that later.

At least since the days of John Snow, American power brokers have been publicly lambasting the Chinese government for currency manipulation. Specifically, the Chinese maintain an artificially low exchange rate by buying dollars and dollar-denominated bonds in the currency and bond markets. In other words, if the exchange rate of yuan-to -dollars (the number of Chinese yuan one can purchase with 1 U.S. dollar) were allowed to float freely, it would naturally decrease.

So, are the Chinese manipulating the market? Absolutely

Is this manipulation bad for the American people? That is another matter.

For if you are a U.S. consumer, understanding that your sneakers and plasticware are coming from China, you might ask for something else from your elected representatives.

Yet, apparently, about 130 members of Congress have sent a letter to King Bush the 3rd requesting that he take punitive action on the Chinese.

Leaving aside the fact that if the Congress feels this is necessary, they should levy tariffs on Chinese goods, like the Constitution says is THEIR job, let's examine this policy.

It is really quite simple. Our government wants the Chinese to allow their currency to appreciate against ours. In other words, they want the Chinese to make the dollars you and I buy things with, LESS valuable. This is exactly equivalent to demanding that the Chinese raise prices on everything we buy from them AND telling them to pay us lower prices for everything they buy from us.

Now, if you've had any experience living in the world, you know that lower prices are better for consumers and higher prices are better for sellers. So why would our government advocate a policy that is bad for almost all Americans?

Well, the short answer is that they don't understand economics. Yes, a few select US exporters would benefit, but let's look at the big picture. The Chinese are allowing us to buy their products at below-market prices. They are effectively giving us stuff for free. If they choose to do this, why would we want to stop them?

Now in my opinion, it is the Chinese that are making a mistake. They are foregoing the benefits of their own productivity. Of course, they feel like there are sufficient benefits to maintaining this policy, and they may be right. But the day will come when that ceases to be true. The best thing we can do is take advantage of the policy while it lasts and prepare ourselves for the day when it stops.

It is certain that the day will come, with or without U.S. pressure, when the Chinese will allow their currency to float. And when that day comes, look out, we will feel it. Be careful what you wish for; be even more careful what you allow your elected representatives to demand.

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