Thursday, September 30, 2010

Those Ornery Chinese

The ignorant lawyers are at it again in our Incumbent Party Congress.  Join me in the New Blood Party; vote them out in November.  They are too ignorant of economics to make laws that affect economic choices that people make.

News Alert
from The Wall Street Journal

"The U.S. House of Representatives passed by a wide 348 to 79 margin legislation to penalize China's foreign-exchange practices, sending a powerful signal to Beijing to change its policies but risking a backlash that could harm U.S. companies and consumers."

The bill passed by the Incumbent Party lawyers is ridiculous on so many levels, it's truly hard to know where to begin to explain why.  But I'll give it the good college try.

First, the Chinese government and central bank cannot make China's goods and services cheaper by manipulating the exchange rate of its currency with other currencies. Cheapness of goods produced in China compared to the same goods produced elsewhere depends on the value of scarce resources used to produce the goods, not on the exchange rate between the Chinese renminbi (and its unit of account, the yuan) and the U.S. dollar.

After all, if all a government had to do to make its people economically prosperous was to devalue its currency with respect to other countries' currencies, then all the world would be filled with wealthy, prosperous people.

Second, anyone who says the Chinese government is keeping the exchange value of its currency below its "true value," must not understand much about international finance, exchange rates, and trade flows.  To say that a currency is "undervalued" is to assert that someone knows what the true exchange value of the currency should be.  But how in the world would anyone know that, if the currency is not traded in a free market?  There is only one correct answer; "they wouldn't."

Since the renminbi is not allowed by the Chinese government and central bank to float in the FOREX (the renminbi is pegged to the dollar by the Chinese government and its central bank),  no one can say what the exchange value of the renminbi with the U.S.dollar "should" be.  But nonetheless, the arrogant Incumbent Party of lawyers thinks it knows.  Please, please, join the NBP and  vote them out of office in November.

Third, just to humor them, let's suppose the U.S. Congress is really on to something.  Let's suppose that Chinese companies can be handed a comparative advantage in trade through manipulation of the exchange rate of the renminbi and the U.S. dollar (just for the sake of dialectical argument).  Why  would the Chinese government want to sell Americans more goods and services than Chinese citizens import from American companies?  

In the end, trade must be a two-way street, otherwise, one of the traders is giving stuff away.  Unless trade flows balance out over time, increased Chinese exports would amount to little more than Chinese companies giving U.S. citizens goods and services in return for pieces of paper with pictures of George Washington printed on them.  What would Chinese citizens be able to do with those pictures (they aren't particularly nutritious, and they make really poor clothing,  for example)?

Fourth (and I really do have to stop after this one; other things to do), if the Chinese government is able to give its citizens an advantage by manipulating the exchange rate, why doesn't the American government do the same?  You already know the right answer.

To whine about trade imbalances between China and America --- and to blame it on the Chinese manipulating exchange rates --- is to mistake causes and effects.  Worse still, to pass laws that pretend to tell the Chinese government what it must do is purely arrogant and moronic, don't you think?

Vote the morons out in November.

1 comment:

rlaugas said...

This is a good one, keep after the Ah's