Friday, April 15, 2005

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The Bush administration gets says it's getting serious about the dollar

Looks like the Bush administration is shifting from passive-aggressive to aggressive in trying to get the Chinese to revalue their currency. Andrew Balls and Edward Alden have the story in the Financial Times:

The US administration is calling for China to move immediately to introduce a flexible currency, a marked shift in tactics after several years of patient diplomacy aimed at nudging China towards allowing the renminbi to float.

A senior US administration official told the Financial Times on Friday: “Action is needed now. This is a co-ordinated effort to get the message across.”

The decision to demand prompt action by Beijing comes in the face of growing pressure from Congress over the burgeoning US trade deficit with China. Officials acknowledge they were shocked by a 67-33 Senate vote earlier this month to allow consideration of a bill championed by Democratic senator Charles Schumer that would impose a 27.5 per cent tariff on all Chinese imports if China does not revalue in the next six months.

“I think they took the Schumer vote very, very seriously,” said Frank Vargo, international vice-president of the National Association of Manufacturers, which has been urging a harder US line on China's currency.

There is also concern in the administration that Beijing might have interpreted the Treasury department's toned-down rhetoric of recent months as a sign that the US is prepared to be infinitely patient on the issue.

The message is being delivered to China at all levels in advance of this weekend's Group of Seven meeting in Washington. China, which has been a guest at the past two G7 meetings, is not sending its finance minister and central bank governor to this weekend's gathering. (emphases in original)

That last bit suggests to me that this pressure won't have an appreciable effect anytime soon. This will irritate the Bush administration but really irritate the European members of the G-7, who blame the United States and the Pacific Rim for the magnitude of current global imbalances.


UPDATE: See follow-on posts here and here.

posted by Dan on 04.15.05 at 08:02 PM


If a person who mostly understands your posts but is a long way from College Economics wanted to gain a basic understanding of the relationship between the trade deficit (also called the current account deficit, yes?) and the annual federal budget deficit, where would that person go?

posted by: CJ on 04.15.05 at 08:02 PM [permalink]

The Chinese government has issues with sharing. It might get lessons.

posted by: Tom Hollsinger on 04.15.05 at 08:02 PM [permalink]

if you cannot stop them who can ? do you WANT TO FLOW DOWN THE RIVER for clowns and lies ! face it you and me are lier's ! when we know, who and what it is 2&2=4 come on how hard is it ?
look around AND think it's been going for along, long time in secrete (SHHHH) ! They just don't GET IT ! God forbid if we do ! or figure it out ! I love how you stand up for YOU & ME ! but in reality we are all living in the ----! who is going to change it! ME OR YOU I waas just dreaming AGAIN !

posted by: lucinda on 04.15.05 at 08:02 PM [permalink]

"If a person who mostly understands your posts but is a long way from College Economics wanted to gain a basic understanding of the relationship between the trade deficit (also called the current account deficit, yes?) and the annual federal budget deficit, where would that person go?
Posted by CJ at April 15, 2005 10:30 PM "

There's actually a pretty good website that will give you the skinny on all the econo-speak that often leave the lay person completely confused (though I hear Brad Delong loves to do that to people....). Anyway, the website is from wikipedia:

It's quite useful for giving easy to understand explanations. I've use it for many a class.

posted by: Wilfred on 04.15.05 at 08:02 PM [permalink]

Thanks Wilfred. I will check that out. I'm not a regular Wikipedia visitor yet (still a Google researcher), but I have a feeling I'm going to be.

posted by: CJ on 04.15.05 at 08:02 PM [permalink]

dan -- shouldn't the title of the post be "Bush administration gets serious about the renminbi", or "gets serious about driving the dollar's value down." Getting serious about the dollar in some long-term sense requires getting serious about the fiscal deficit.

CJ. Here is one way to think about the link between fiscal deficits and the trade/ current account deficit. In a formal sense, there is an accounting identity that tells us that the difference between imports and exports is equal to the difference between domestic savings and domestic investment. The links come from factors that drop out of the equation, namely domestic consumption -- higher cosumption = higher imports, and higher consumption = less savings. The fiscal deficit is a drain on national savings. So the "savings minus investment gap" can be broken down into "public savings and a private savings." If public savings falls (economese for a budget deficit), AND there is no offsetting changes in private savings or private investment, the country will save less than it invests, import capital from abroad, and run a current account deficit.

Another way to do think about it is that a country that saves less than it invests has, in a sense, outsourced savings, and thereby relies on foreigners to save some of their export earnings here in the US rather than spend them on US products. We don't save our current income, but our trading partners do ...

posted by: brad on 04.15.05 at 08:02 PM [permalink]


You might also want to check out "A Beginner's Guide to the World Economy" by Randy Epping, or Paul Krugman's "Pop Internationalism"

...though be aware that while Krugman is a great economist, he is an arch-liberal and hence might be somewhat biased in his appraisals. His textbook on International Economics is simply excellent.

posted by: jprime314 on 04.15.05 at 08:02 PM [permalink]

The "status quo" has the Social Security pumping $1.7 trillion dollars into the capital markets over the next 40 years. That's already been deemed to be to little to pay the commitments.

No dollar crisis there.

posted by: Neo on 04.15.05 at 08:02 PM [permalink]

Now, wait a minute.

I had heard that, if China stopped pegging its currency to the dollar, the value of the US debt it holds would sink like a brick. I had heard that would be disastrous, as it would spur China into backing away from backing our deficits.

So how is it a good thing for Bush to be pressuring China into re-valuating its currency?

posted by: Palladin on 04.15.05 at 08:02 PM [permalink]

Brad and jprime314 - thank you both for the additional information and book recommendations. I read the Times so I know Krugman's politics well. As an independent, I tend to take everything he says with a grain of salt or three, which is why I wanted some more independent sources of information.

posted by: CJ on 04.15.05 at 08:02 PM [permalink]

I'm going to have to second Palladin's concerns. Are we really in any position to tell China to stop buying dollars and artificially pegging their currency to ours? If they don't do that anymore, then we won't have a soft landing but really hard one. And I'm not sure we want that.

posted by: mikey on 04.15.05 at 08:02 PM [permalink]

What you are looking at is the result of dollar devaluation of over 13% since John Snow became Treasury Secretary. An easier way to look at it is the rise in the Dow Jones Industrial 30 vs any European market with the $ pegged to a 2000 value. It was basically flat and is now down. Bretton Woods II is now over.

posted by: Robert M on 04.15.05 at 08:02 PM [permalink]

Palladin - someone else should correct me if I'm wrong, but isn't China unlocking its currency from the dollar good because it will allow the trade deficit to come down? I'm pretty sure that as the value of the dollar decreases, it makes the value of U.S.-held Chinese exports and assets more valuable in relation to Chinese-held U.S. exports and assets.

Isn't that what's happening with the EU as the value of the dollar decreases against the euro?

posted by: CJ on 04.15.05 at 08:02 PM [permalink]

I know Brad and others already had a crack at this, but here it goes anyhow: The U.S. have been spending more money buying stuff than the money it earns selling stuff (the current account deficit). And to make up for this shortfall we have been printing more money so that we could buy more stuff. Now if we were any other country, we would've been told stuff it a long time ago. But we're the mighty U.S.A., so we have been counting on other countries who need our business to lend us more money so we can continue our spending spree. Imagine an aristocrat on the brink of bankruptcy, who is nevertheless still charging expensive carriages and powdered wigs on credit. The shopkeeper gets increasingly worried, his bankers gets increasingly worried. But nobody wants to say anything because if he owes them so much money that if he goes down, they'll all have to take a loss.

And as for the revaluation of the chinese currency being good for our trade deficits, maybe, in the looooong run. But you have to understand that our dependence on cheap goods from abroad in general and China in particular is so complete that even adverse financial conditions will not be able to reverse it overnight. We simply don't have the factories that make the TV sets any more. We have no cheap labor to sew the GAP cloths Americans now count on. And the effect on our consumer-driven recovery will be devastating. I have a hunch that if a devaluation so complete that importing from China is stemmed (which I infact highly doubt), our CA deficit would not be helped much because we would end up buying our consumer goods from other foreign countries and paying much more for them.

posted by: Battlepanda on 04.15.05 at 08:02 PM [permalink]

iprime314 -- I must take exception to you description of Krugman as an arch liberal.
Remember he was a member of the Reagan economic staff.

He is not so much of a liberal as a person who objects to the dishonest economic policy and numbers being put out by Republicans. He just does not believe that 2 plus 2 equals 5.

posted by: spencer on 04.15.05 at 08:02 PM [permalink]

If "liberal" is bad then "arch-liberal" must be REALLY, REALLY bad.

posted by: three hills on 04.15.05 at 08:02 PM [permalink]

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