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In Defense of China

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September 15, 2010 – Comments (6)

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).

6 Comments – Post Your Own

#1) On September 15, 2010 at 10:31 AM, russiangambit (29.49) wrote:

Through the PEG China is actually beholden to the US monetary policy. Thus the inflation in China.

And, yes, talking about manipulation and fiat currency as if only some  "bad" countried do that is just silly. Manipulation is at the very core anyfiat currency in the first place, its sole purpose for existence is to be manipulated by the central bank.

Just mroe brainwashing for uneducated masses.

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#2) On September 15, 2010 at 11:38 AM, outoffocus (23.59) wrote:

I remember seeing that quote yesterday and thinking, "are you freaking kidding me?"  He is clearly contradicting himself and putting his foot in his mouth.  How is he going to advocate more government spending but then tell our second biggest creditor NOT to lend us money for said spending?

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#3) On September 15, 2010 at 11:42 AM, russiangambit (29.49) wrote:

outoffocus, this part is the really fun one. Here is how it works - primary dealers are obligate to buy Treasuries, and if for some reason they are unable to resell some of it FED can always get back to them and buy them as a part of the QE purchases.

China actually doesn't buy that many treasuries anymore. I think I read somewhere  a months or so that they weer net seller. China is trying to diversify ebcause they already lost a whole bunch of money on treasuries.

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#4) On September 15, 2010 at 1:01 PM, dbjella (< 20) wrote:

#3

How did China lose money in treasuries?

Thanks 

 

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#5) On September 15, 2010 at 3:48 PM, russiangambit (29.49) wrote:

#4 -  I don't really know how they would manage that since Treasury rates have been going lower and lower, though they'll will at some point if rates will ever normalize.

But there were rumors a couple week ago , and even though half of it is probably not true, some if could be true. Where is smoke, there is fire.

 http://wallstreetpit.com/42843-chinas-central-bank-chief-gov-zhou-xiaochuan-rumored-to-have-defected Report this comment
#6) On September 15, 2010 at 8:38 PM, rhallbick (99.72) wrote:

#4 & #5:  Plus factor in exchange rates.  The dollar is at a 15-year low against the yen.  China continues to redeem reserves in exchange for infrastructure and commodities.

The US problem is an overextended debt level.  That is not China's fault, but rather our own.  Did China entice people to buy houses that they couldn’t afford?  Did China entice Americans to run up their credit cards?  The bottom line is that a unsustainable US debt level needs to be paid-down, adjusted, written-off and/or defaulted-on to a manageable level before we can move on. 

Perhaps Krugman should go to China to study real Keynesian economics in action.  US Keynesians seem to forget the part where the public sector accumulates reserves during economic expansions. 

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