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Currency Manipulation: Why Blame China For Something We’re All Doing

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You do not need to be an economist to realise the U.S. Treasury’s claim that China does not manipulate its currency is laughably false. The Chinese government and not the markets decide what the yuan is worth in terms of other currencies such as the US dollar. By doing this the communist government can keep Chinese wages at artificially low levels we cannot compete with in the west. What the Treasury should have said is that China is only doing what everyone else does. In fact she may be protecting us from even worse consequences of currency manipulation by our own governments.

Currency manipulation is nothing new. From as far back as people have trusted currencies issued by their rulers, the rulers have abused that trust. The Roman Emperors used to debase the currency by replacing silver with less precious metals.

The “inflation tax” is still one of the most common manipulations today. When governments print money to pay for unfunded spending all we notice is that prices are a little higher. Most people do not equate the fact that their money buys less with the reality that the government is taking more.

When the Bank of England was created in 1694, a one pound note bore the inscription “I promise to pay the bearer one pound [of sterling silver]“. UK bank notes still have that inscription but are worth a fraction of 1% of that value. Such is the extent of this form of manipulation that even the once worthless copper is now worth more than the (US) pennies it is used in (British pennies are now made of steel and coated in copper). It’s unlikely this will ever happen with paper money although since more than 99% of notes circulating in London contain cocaine, you never know.

After the Second World War, currency manipulation took on a new face. Politicians believed they and not markets should set the price of money for the good of society. Exchange rates were fixed, limits were set on how much money could be taken out of the country, and institutions such as the International Monetary Fund were set up to manage the world economy. This practice continued into the 1970s. In other words, we did exactly what the Chinese are now doing just 30 years ago and on a much more massive scale. In fact we never stopped; western nations are still currency manipulators.

After the collapse of the exchange rate system the European Union tried to introduce its own system called the Exchange Rate Mechanism (ERM). They then fixed exchange rates between members completely by introducing a single currency; the Euro. However control over the exchange rate comes at a cost to control over the national economy. No country that has the Euro can set its own interest rates. The rate is the same everywhere even if one country is in a recession and another is in an inflationary boom. When Britain was in the ERM the government was forced to raise interest rates twice in one day from 10% to 12% to 15% to attract foreign money into the country and prop up the value of the pound. Once government stops trying to set exchange rates it is able to use interest rates for other purposes, such a setting a target for growth or inflation. It’s still currency manipulation, just with a different goal.

Just like the Roman Emperors, our politicians use currency manipulation for their own benefit. The cost to us of having money now is the interest we pay later. By printing more and increasing supply, governments can make money cheaper. They do this around election time to make mortgages or credit card debt cost less and encourage investment and job creation. It makes us feel better off in the short run but the cost of cheap money is that the money we have already saved is worth less too. They are so bad at this that investors have lost confidence and politicians have been forced to hand power over to independent central banks like the Federal Reserve which were once rare but are now the norm. However the manipulation does not stop there.

Every major western government is borrowing hand over fist and the central bankers they appoint are printing money to prevent their profligacy from sending the cost of borrowing sky high. The US Congress, although by no means the only offender, is the worst. The only reason that this has not caused massive inflation is because China has so far been willing to take worthless paper in return for real goods. Like all rulers they’re not acting out of the goodness of their hearts. A bout of inflation in China’s number one customer would threaten Chinese prosperity and stability, and that would be bad for the communists.

The people accusing the Chinese of acting unfairly are the very people China is bailing out, i.e. Congress. They charge China with “stealing” jobs. It is true that some jobs that were once done in the west are now done in China but that does not mean that there will be fewer jobs here. China’s currency manipulation means that we can have cheap borrowing and low prices. The economic equivalent of having your cake and eating it is behind the most powerful jobs-creation machine in the world.

The process of growth is one of old jobs disappearing and new ones emerging which is what is happening here. China will, in time, revalue the yuan against the dollar. This will not happen because Congress talks tough but because it will be in their own interests. China’s trade surplus is not as huge as you may have been led to believe. Most of the money made from exporting to the US is spent on importing the raw materials to make those exports. The soaring cost of commodities such as oil, gold and copper means that they will have to pass some of that cost on to their customers by making their currency more expensive. It is better we let them do this in their own time so that we are not hit by rising prices and a rising cost of borrowing all at once.

None of this should be read as a support for currency manipulation of any kind. I am merely pointing out hypocrisy by those wishing to divert attention from their own failings.

About Mark Richard Adams

  • mark richard adam

    and you will never understand that.

  • azminivanracer

    interesting bit here.
    while its interesting, you provide no hard facts as to what the government is doing to ACTUALLY manupulate the value of the currency. there is more to it than lying and saying its worth more. there are intracate pieces in play. the government (with the acception of the bush administration) thinks things through. “the government doesnt take a dump without a plan”

    so while your piece was intriguing and interesting to read, im still not convinced (by you)

  • stoneweapon

    At some point we have to blame China for not reciprocating trade or blame ourselves for consuming more than we produce. If Chinese corporate and government sectors think they can get away without penalty; oppressing their own people for cheap labor and hoarding trillions of dollars worth in foreign currencies from their largest customers for the use of strategic natural resources instead of buying the goods and services that we can provide to benefit their people, then they are wrong. If the US cannot work off its debt, eventually the debt is printed to balance the trade. The devaluation of the USD is punishment to China for hoarding and not reciprocation trade, and it is punishment to the US for consuming more it produces.

  • Dave

    the US should set a minimum wage due to employees of all multi-national U.sS based companies. They should also encourage poorer countries to allow the usage of international debit cards and set the credit card qualifying salary to $8000

  • Rsa

    somebody said American jobless is because of China, but i wonder after imposing the tariff to China imported good to United State, would these multinational company start to find others alternative cheap labor manufacturing based in Asia country like India, Vietnam, which still cant help American to create the job eventually. Any one have idea?Even though there are no China today, but there are still a lot of others Asian cheap labor countries, should USA imposed duty tax to all cheap labor countries in the earth? and make the multinational companies no way to build factories except United State?
    From my statement above, It seem like this jobless issue is because of the decision of multinational companies to decide where to build their factory based on the cost issue. The dominant paradigm on this page” China currency manipulation cause American jobless” cannot hold it stand.
    i hope someone can beat my mind on this issue with stating why you are not agree with me based on what i was saying above.

  • Kate

    An interesting counter-article you should all read (and this one actually provides some hard numbers).

  • Tony

    U.S. Views on China currency:

    By Tadie

    The USA generally holds the view that China manipulates its currency by holding down its value versus other currencies ( notably the dollar ) to maintain its export driven economy, keep employment high in the base manufacturing sector and fuel economic growth – also adding to its massive holdings of foreign currency reserves ( held in dollars, euros and yen ).

    The base thought in the USA and its Euro allies is first and foremost a political one – that they ( the USA and Europe ) have been losing their manufacturing base to China over the past decade since China’s entry into the World Trade Organization ( WTO ) and gaining MOST FAVORED NATION STATUS ( for trade ) in the USA. The thought is that China offers a massive labor pool at inexpensive rates. Also, lax enforcement or non existence of environmental laws also is attractive to firms in the USA and Europe.

    The concern on political types in the USA ( the U.S. Congress and President ) is one of a political nature. The citizenry ( voters ) are upset regarding the current economic situation and high unemployment in the USA. It is worth noting that in the first half of the decade ( 2000 to 2005 ) there was little concern and even less talk of China’s growing economic power.

    Part of the problem is that Americans fail to note that they themselves are part of the problem. It’s a “chicken and egg” issue. Americans say “everything is now made in China” but China will say “your companies came here for cheap labor to increase profits”. It’s well worth noting that Americans do not have to buy Chinese made goods. It’s also worth noting that they don’t want to pay the necessary price to “buy American”. It’s the old political problem where everyone agrees we have to “kill some cows” but nobody wants to kill their own cow. Everyone expects someone else to sacrifice.

    Now, to say China “manipulates” its currency is my view absolutely true. However, the same can be said of the USA and every other large economy ( Japan, Germany, the UK, etc ). The other countries just do it in another manner – they use deficit spending, essentially increasing the supply of their own currency ( printing money ) which like an over supply of any commodity ( and money is a commodity, a fiat one, but a commodity none the less ) creates an imbalance in the “market” and hence drives down the price, or in this case the value of the currency.

    Countries do this for an obvious reason, to drive exports. China does the same thing. The problem countries have with China is that China seems to be winning this game, for the time being.

    Now, the problem for the other countries if China decides to allow its currency to rise in value ( perhaps by as much as 40% ) is that China’s purchasing power increases exponentially overnight. Let’s think of one of those base products in the world that is priced in Dollars – Oil. If China’s currency rose in value by 40% versus the Dollar overight then the price it pays for oil on the world market would be 30% less ! That economic dynamic alone could create massive problems for other economies – most notably the ability of China to acquire massive reserves and essentially hold huge power over the precious and finite supply and production of energy – which all the industrial economies ( most notably the USA ) depend upon.

    If China did control or have a large share or the ability to purchase large reserves or production they could essentially hinder or even cripple western economies by either denying access to current supplies or driving the price so high that it creates crippling economic effects in those economies ( inflation, reduced production ) and hence even more dependence on China exports.

    Unfortunately, for the west, politicians are prone to “play” to the voters and follow “mob” thought – that is to say and do what popular opinion dictates, rather than having a reasonable discussion of the repercussions of what such actions could cause in consequence.

    It sounds good to “bash” China now, especially since our economy ( and the west as a whole ) is suffering the malaise of the financial meltdown of the past decade. Perhaps it’s part of our culture – it’s not our “fault” and we need someone to blame.

    There’s a real lack of knowledge on the American populace side as to world or domestic economics, perhaps in China, too. However, politicians in America are beholden to special interest groups, popular opinion and voting groups – so if less than a transparent message works then that’s what you run with all the way to the election.

    In America, the popular opinion now is that China cost us jobs, millions of them. I would say that is true. But, China has also kept interest rates low here ( by financing our massive government spending ) as well as supplying with inexpensive goods ( keeping inflation low ). You won’t hear that side of the argument here – it’s not what people want to hear. It’s not what the politicians or media “spin” in their message.

    To Americans its easy to say its China’s fault. In part it is, but American management and politicians instigated the problem.

    In general, in America, we just need somebody to blame. It’s the American thing to do.