China’s Cheap Tricks Fool No One

Posted by Michael A. Kamperman on June 22, 2010

Here we go again.  China once again throws us a bone to pacify the barking dogs calling for reform.  First China “pretended” to run a trade deficit right before the Treasury had to declare whether or not China was a currency manipulator.  Predictably, Geithner took a pass.  The next month China once again ran a huge trade surplus.  Now China has decided to adjust its currency, the yuan, to a basket of currencies including the euro and the yen as well as the dollar.  This decoupling of the dollar is nothing more than a smoke and mirrors trick.  China still plans to go “slow.”  In fact, Nouriel Roubini pointed out this new structure would allow China to actually weaken its currency against the dollar in the event the euro and yen were to fall significantly against the dollar.  What is actually happening is having the yuan tied to the dollar has stuck China with the unintended consequence of seeing its currency rise in value against the euro, whose countries represent its largest trading partner.  Despite all the talk about China being concerned about our fiscal position China never took the step to diversify away from the dollar when the dollar was weakening against other currencies.  Now that it is strengthening they suddenly want diversity.  And predictably, this move occurs right before the G-20 meeting next week where pressure was about to be ramped up on China to reform.  Now they can wink and say they already did.

China’s policies are destabilizing the global economy to the benefit of China.  Currently China purchases only one dollar worth of goods from us for every four dollars it sells us.  Even Japan is only at a two to one ratio vs China’s four to one ratio.  Additionally, China has horrific working conditions for little pay.  The time has come for the U.S. to tell China the free ride to development is over.  Not only must China begin to import more goods, but it must also begin to improve working conditions and raise workers pay.  If this costs it some exports, then so be it.  There is a direct link to the debt crisis in the West and China’s flooding Western market with cheap goods based on a manipulated currency on the back of all but slave labor.  Workers in the West that are forced to compete are being forced to take big pay cuts.  Less income reduces their ability to pay their debts.

The upcoming G-20 summit represents an opportunity for President Obama to stand up and be counted.  He should not tell others simply what they want to hear.  He should not concern himself with America’s likability by the rest of the world.  he should tell China the jigs up and gradualism they crave is unacceptable.  He should tell Europe, particularly Germany and the U.K., that austerity will solve nothing and will ultimately trap the Western World in a prolonged debt induced depression.  He should stand up for Radical Keynesianism.  It’s actually comical that the Great Depression of the 1930′s demonstrated Keynes was right and the Austrian Economists were wrong.  So who is the world turning to during the next debt-induced Great Depression but the Austrian Economists.  Finally, he should then turn the microphone to the U.S. Congress and admit the stimulus bill he championed was too small, not too big.  He should lay before them another stimulus bill for 2011-2012 of more than one trillion dollars.  This time he should he include massive infrastructure spending, which will improve America’s productivity.  He could show real leadership.  While not holding my breath, I remain hopeful.