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Getting Serious

Dan Drezner's got a post entitled "The Bush administration gets serious about the dollar". It's hard to detect much seriousness there. Rather than addressing, say, the massive budget deficits that are leading to the unusual currency situation, or trying to do something that would reduce American oil consumption, they're getting serious by asking the government of China to float their currency. They've got no leverage they can use to make China do this. They're just asking. But seriously. This is, admittedly, a more serious approach than Senator Schumer's bill "that would impose a 27.5 per cent tariff on all Chinese imports if China does not revalue in the next six months," which is apparently gaining traction in the Senate. And what if this approach worked?

If I were part of the Bush Administration's economic high command, though, I would worry that China might take the hint. If China revalued (really revalued) and its reserve accumulation slowed, the US might find it a bit harder to find buyers for all the IOUs the Treasury is churning out, even as US "soft patch" could widen the US deficit. And there might not be quite so much demand for Agency debt/ mortgage backed securities either.
There seem to be good arguments in favor of a revaluation of Chinese currency, but they're mostly arguments that this would make China better off. From the American perspective, revaluation isn't a substitute for real policy measures aimed at bringing our financial system back toward sustainability, it's just something that would force action on us.

April 17, 2005 | Permalink


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Matthew Yglesias writes: Matthew Yglesias: Getting Serious: Dan Drezner's got a post entitled 'The Bush administration gets serious about the dollar'. It's hard to detect much seriousness there. Rather than addressing, say, the massive budget deficits ... [Read More]

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Tracked on Apr 18, 2005 10:34:37 AM


This is insanity. Getting the Chinese to revalue their currency will help our exports (some), but worrying about our exports now when our deficit is this serious is misplaced priorities on rearranging-deckchairs-on-Titanic proportions. I wish they had not propped up the dollar in the first place, so that Bush could not go on his spending spree. But now, to let the dollar fall sharply is in nobody's best interests.

And the woes that a sharp tariff would wreck on our economy would be quite devastating. We simply don't make our own TV sets, lingerie, toys etc. etc. anymore. If we don't get them from China, we'll end up getting them from somewhere else and paying more for it.

Posted by: battlepanda | Apr 17, 2005 11:24:15 AM

Questions: would a revaluation of the renminbi mean China would pay a lot more for oil, which is traded in dollars? Which would mean that China, to maintain the current level of growth would need to buy even more of the American debt (in order to get dollars for oil purchases)?

Brad Setser i think is projecting a Chinese dollar reserve of nearly a trillion by the end of 2005. Chinese economy not so large that taking a 20-30% loss on that money wouldn't be significant.

I think Bushco would rather Europe was forced to buy more T-Bills, or take an economic hit if they don't. The game here is to get the Iraq war and inheritance tax cuts financed by other countries and the American worker. Oooooh, they are so slick.

Posted by: bob mcmanus | Apr 17, 2005 11:28:52 AM

The argument for revaluation is that given that it's inevitable, better now than later. The longer China waits, the more painful the adjustment for the United States.

There are many industries that are not competitive with an artificially deflated yuan. Any companies that are downsized or bankrupted in this environment have the effect of destroying domestic capital, capital that will have to be recreated once the yuan floats.

The argument would be a lot more compelling if the government deficit wasn't out of control. Given that it is, and that there's no force on Earth that will cause the Republicans to do anything about it, we're better off taking the cheap financing until the adults get back into government.

Posted by: Walt Pohl | Apr 17, 2005 11:35:36 AM

Oh, and as far as the Senate tariffs go, IIRC, Schumer & Graham are deficit hawks. The tariffs are not entirely aimed at China. If China cannot sell us pajamas they don't need our dollars, and Bushian borrow & spend & tax cut policy is screwed.

We are not very far from the interest nut cutting deeply into the discretionary budget. A couple more basis points and we are looking at a trillion dollar budget deficit, and a budget process that will draw blood.

Posted by: bob mcmanus | Apr 17, 2005 11:36:49 AM

"There seem to be good arguments in favor of a revaluation of Chinese currency, but they're mostly arguments that this would make China better off."


I've seen plenty of arguments that a Chinese float would benefit American interests. Do you think Chuck Schumer is the Senator from Guangdong?

I haven't formed an opinion on the merits of the issue. But I find it odd you don't think those arguments exist.

Posted by: Petey | Apr 17, 2005 11:37:08 AM

"but they're mostly arguments that this would make China better off."

Not sure what the revaluation of the renminbi would do, but China currently saves around 50% of its GDB (whatever that means). They definitely do not want to increase consumer spending, for whatever reasons.

Part of what is going on is that China does not want foreigners buying their land and factories. The world is drowning in cash with no good places to invest.

Posted by: bob mcmanus | Apr 17, 2005 11:47:35 AM

There is no way any realistic currency adjustment can make corresponding (non-existent) US industries competitve. You can't beat 17c/hour wages. Walmart prices will go up a bit, US consumption will drop a bit, imports from China will drop a bit - but no one is going to start producing t-shirts in the US.

Posted by: abb1 | Apr 17, 2005 12:02:08 PM

I agree. The President and his people are always looking for China to revalue their currency or for other countries to boost their growth to help us while they do nothing to fix our own deficit mess.

Posted by: Carl | Apr 17, 2005 12:11:34 PM

Say that you are stuck up in a tree. You want to get down on the ground, but simply jumping off the nearest branch is not a good approach despite the fact that it is the most direct way of getting off the tree. I would argue that we are stuck high enough up this particular tree that if China pushed us off, there would be plenty of broken bones.

We all agree that eventually the RMB has gotta come to a less ridiculous value against the dollar. But that is no reason to provoke China to drop the dollar like a stone and dropping us all into a worldwide recession. (Not that I think they will, whatever what we say.) A better approach is to look at the fundamental reason why we're in this particular mess -- fiscal irresponsiblity coupled with a whopping current account deficit -- and try to do something about that before the day of reckoning comes.

Posted by: battlepanda | Apr 17, 2005 12:49:03 PM

while I could not agree more that the US should not be running budget deficits in normal times, and that Bush has been fiscally irresponsible on a grand scale, I have to wonder what that has to do with the trade deficit. Would fixing the budget deficit have any effect on the trade deficit? Didn't we have a trade deficit back into the 90s when the budget was in surplus?

Posted by: JonF | Apr 17, 2005 12:51:01 PM

I'm sorry, but that post is way, way, way over-simplistic as this post on my blog illustrates.

The Bushies don't have a clue.

Posted by: Mumon | Apr 17, 2005 1:13:20 PM

(That is the post Matt references.)

Posted by: Mumon | Apr 17, 2005 1:13:49 PM

It strikes me that a world-wide recession might not be such a bad thing for China. What they need now is energy and food, which would be cheaper in a recession. Besides, a world-wide average growth of -5% might still leave them positive growth. They will still have the low-cost manufacturing capability relative to the U.S. so their exports might not even suffer that much.

Posted by: Tim H. | Apr 17, 2005 1:33:09 PM

Battlepanda,You might be amazed at the fairly large number of socks that are still made in America, oddly enough. That said, buying products from Mexico (which definitely has the infrastructure for cheap electronics manufacturing), would be an overall good thing for the U.S., given that greater economic growth there would have all kinds of positive benefits. For example, PRI and PAN wouldn't have much need to resort to sleazy tactics to block socialists from running for office, since such folks tend to lose mass appeal in economic good times.

Posted by: Andrew Reeves | Apr 17, 2005 1:51:56 PM

Petey: No, I don't think Schumer is the Senator from Guangdong. What I do think is that Chuck is expert in formulating non-serious stunt proposals aimed at earning him favorable media attention. The great appeal of this proposal to Schumer is that it stands no chance of actually happening, allowing him to atract attention as urging the President to "do something" about the issue.

Posted by: Matthew Yglesias | Apr 17, 2005 2:57:08 PM

Matt you're getting warmer. Look closely at the deals cut internationally since 2003. China and friends, within and without the asian trade zone, current positions are of much more significant scale than the potentially correcting force with which Brad paints them in his conclusion.

The official economics line can be seen in
Mumonno's linked London Times article actual URL is below.


These positions were not taken for reasons of economic altruism, this is a political statement made quite openly over the last two years.

(Rant follows including lots of breathless accusation and wild eyed speculation. ed.)

(Snarky Summary: "It's people! Soylent Green is made from people!" ed.)

The harsh reality is not that this administration is ignorant of this, or that somehow it doesn't understand. The adminsitration understands completely and just plain doesn't care. It doesn't care about the dramatic domestic economic destruction clearly on it way, or the cost in lives of citizens in the event of replays of the events of fall 2001. It cares about nothing more than its own aggregation and consolidaiton on power; which it plans to maintain in every branch of govenment long after the current oval office holder departs.

The well documented internal adminsitration belief that they can "create reality" not just the public perception of reality, is the steel axis upon which this psychotic decision making machine is firmly rooted. Your earlier moanings on the lack of policy operations within the administration should have keyed you to this, its not ignorance or incompence- it's designed malice.

Stop wasting your time watching basketball. Get on the stick and start reporting on all the juicy details of this administration intentionally chugging the world into an international train wreck! Maybe if you and the other who's in whoville scream loud enough the drivers of this train can be forced to hit the breaks before its too late.

Posted by: patience | Apr 17, 2005 3:31:18 PM

mumon -- come over to my blog, and I'll happily debate the points raised by the london times article. I'll touch on a few of them here.

1) China's overall trade is close to being in balance. Simply NOT TRUE. China ran a 4.5% of GDP current account surplus in 04. That's a bit smaller than Malaysia, tis true. but it was larger than Japan's current account surplus. Moreover, China's seasonally adjusted monthly trade surplus is now $9 bil (UBS), putting it on track for a current account surplus of over 8% of GDP. Moreover, it is totally clear that a Chinese revaluation would lead to an appreciation of the korean won, the malaysian ringgit and a host of other asian currencies as well. the casuality goes in the other way: China's peg has limited their ability to let their currencies appreciate (look at the statements from the korean central bank since january if you don't believe me).
2) China is so cheap that revaluation would have no impact on US trade with China, it would only help Vietnam, etc. Two points: a) recent econometric work by Goldman indicates China's exports actually are responsive to the exchange rate. that study was done with global, not bilateral trade, but that's what matters and the US is a big enough market that it would be hard for the US result to be massively at odds with the global result; b) you are looking only at the direct trade effects, there are also financial market channels -- a revaluation that ended speculation on upward appreciation of the renminbi would reduce China's reserve accumulation, lead to less Chinese financing of the US, and upward pressure on US interest rates.
3) "China, meanwhile, has been selling renminbi (RMB) and buying dollars not so much to keep its exports competitive, but to maintain some semblance of stability in its domestic banking system." -- Really? What is the evidence behind this often made point? The IMF did an exhaustive study which argued that China's financial system was well positioned to survive a revaluation, because it has little fx exposure. The risks only come if you think that a revaluation would lead to massive problems in China's export sector, bad loans to export-oriented firms (who have domestic currency debts and foreign currency revenues, and thus could be hurt be a revaluation), and this trouble for the banks. And the link here breaks down if Chinese firms can increase their dollar prices after a revaluation to cover their renminbi costs. Finally, what evidence is there that the current peg is making the chinese banking system more stable? It sure seems to me that the peg is fueling rapid monetary and credit growth, and rapid lending growth risks laying the basis for big trouble down the line. The Chinese have been hiding behind the "our financial system is not ready line" for a long-time. Their financial system is not pretty, tis true -- but keeping the peg risks making it worse not better.

(apologies for the length)

Posted by: brad | Apr 17, 2005 4:14:40 PM

Anything wrong with asking?

Just asking...

Posted by: BroD | Apr 17, 2005 8:41:40 PM

Re: It doesn't care about the dramatic domestic economic destruction clearly on it way, or the cost in lives of citizens in the event of replays of the events of fall 2001.

Are you attempting to say the events of 9-11 were somehow related to our trade imbalance with China? Or that somehow another terrorist attack of that magnitude may be so connected?

Posted by: JonF | Apr 17, 2005 9:54:29 PM

All this talk about how bad the budget deficit is seems to me to be bunk. We had much larger budget deficits in the early '90s and mid '80s. It is simply not as big a deal as the lefties are making of it.

Posted by: Al | Apr 17, 2005 10:45:11 PM


To me, China revaluing its currency is peanuts to us getting our house in order. Depending on exports to bails us out of budget deficits induced by Bush policies is the easy way out acomplishing nothing as Bush deepens the deficit with ever more budget deepening proposals.

In other words, who cares if we make more money from exports if we spend just as fast on deficit inducing tax policies and spending proposals...by the big guvmit Taliban GOP.

As far as asking China to re-value? Isn't that like asking a medical friend to re - evalue their assesment of you being a drunk when you refuse to get help (REAL help)? A change of opinion on his part would help you to get a prize if he did re - evalue you as being sober when you were still a drunk.

In this case, Bush/GOP is the drunk who refuses to get real help.


Posted by: Carlos | Apr 18, 2005 3:12:11 AM


Yes, we had big deficits before but at least some people who thought that deficits DID matter took over at that time....you know....

If this country operated at that time under your criminal mentality, I cant see us doing anything but more deficit and debt spending.

Its funny...the GOP always brags about having an "MBA" president and running things like a "bizness" not a burecreatic guvmint.

However, any business running its balance sheet with Al and the GOP/MBA president's attitude (congress and white house)is BOUND to go bankrupt no matter how big its credit card.

Its seems Al and the MBA/GOP crowd run bizness like Worldcom and Enron rather than honest companies.

We KNOW what the GOP wanted to do when in controll of congress and the WH, spend like the whores they are. At least during the 1990's Clinton blocked them. To those who say that democrats are no better, I say, well give us a chance to control the government now and well see.

God, why am I a liberal? Its so much fun being a GOP/MBA/"bizness" runner to blow through trust funds like hot cake, deficit and debt spend but claim that it dont matter. All the while I can claim to wanting "small" guvmit with controlled spending.

Alas, I have a conscience which prevents me doing that scam.


Posted by: Carlos | Apr 18, 2005 3:25:08 AM

Its funny...the GOP always brags about having an "MBA" president and running things like a "bizness" not a burecreatic guvmint.

Yes, it is a business. Like www.pets.com

Posted by: abb1 | Apr 18, 2005 4:18:56 AM

Al,Something to think about is that in the 1980's, when the Reagan administration saw that the deficit was ballooning, it raised taxes. In 1986, the Congress passed a law that cut out a good many tax loopholes.Contrast this to the Bush administration, which, when it sees that the deficit is ballooning, does the equivalent of putting their hands over their ears and screaming, "I'm not listening!" Contrast the 1986 law with the Bush Administration/GOP Congress's current attempts to add even more loopholes.Do you see why the first, even though it led to deficits larger in % of GDP terms than today's was nonetheless much less unnerving?

Posted by: Andrew Reeves | Apr 18, 2005 7:45:42 AM

i spoke with an side to senator schumer last week about this well intentioned but thoroughly misguided piece of legislation.the aide did not have even the remotest clue about the chain of unintended consequences which would ensue if this silly legislation were to pass.scary!

Posted by: john jansen | Apr 19, 2005 12:28:42 PM

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