In Defense of China
Once again Krugman has proposed insanity - to use political means to stop China from manipulating its currency. As if the U.S. adding $2.5 trillion to the Fed's balance sheet doesn't count as manipulation. As if constantly running huge account deficits isn't manipulation. And lets be absolutely clear, China's manipulation is a PEG to the dollar. The yuan is no weaker/stronger compared to the dollar than ten years ago (actually its a bit stronger, but that doesn't help Krugman's argument so he leaves that out).
Krugman goes a step further, stating we should stop the Chinese from buying our bonds. Considering they've REDUCED their holdings of U.S. debt over the last year, it's hard to believe Krugman understands anything he's talking about, unless he's trying to create an anti-China scare.
Krugman states "The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus." This is exactly what I wrote about in 'The Tariff Race' over a month ago (Mr. Krugman, stop stealing only some of my ideas and please steal them to see the light of Free Markets).
But lets go a bit beyond Krugman to see why fantasy currency's (aka: fiat currency's) are doomed to failure. Notice how "manipulating a currency" is considered bad. How Krugman and others are furious at China (and Japan back in the 1980's). But the very concept of a fiat currency is to give it the flexibility (aka: manipulate it) to expand/contract in a way that gold backed currency can't. So we now have politicians/op-ed columnists bitching about country's using fiat currency's in ways that they don't like.
Are these people so intellectually challenged that they can't understand that their system is flawed. Yes, they are! They believe if their was just ONE MORE regulation, just ONE MORE rule, their system would work perfectly. It's no different than when a bank/insurance company finds a loop hole in the law and exploit it. The regulators attempt to patch it up with ONE MORE rule, only to find out hole just sprung up somewhere else.
A commodity based currency works because if you don't have the commodity to back your claim, you go to jail. Their is no fabrication of money. You don't need any rules. If a bank wants to give out a note in promise of the commodity, you can either accept it, deny it, or take it a less than full value to deal with the inherent risk involved. No rules needed.
Were their banking panics in commodity based currency's - YES! But it only concerned the poor memories of people willing to accept notes as a replacement of money. Those holding the real currency never had a problem.
So am I defending China? Absolutely. If you want to play in the world of fiat currency's then manipulation of one's currency must not just be expected but ASSUMED. I wonder if Krugman is going to write about Japan after their attempt to devalue the Yen (something the Chinese haven't done, they just keep the PEG).