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.