Guest Post: Is China A Currency Manipulator?

Tyler Durden's picture




 

Submitted by John Aziz of Azizonomics

Is China A Currency Manipulator?

Mitt Romney thinks so:

China has an interest in trade. China wants to, as they have 20 million people coming out of the farms and coming into the cities every year, they want to be able to put them to work. They want to have access to global markets. And so we have right now something they need very badly, which is access to our market and our friends around the world, have that same– power over China. To make sure that we let them understand that in order for them to continue to have free and open access to the thing they want so badly, our markets, they have to play by the rules.

 

They’re a currency manipulator. And on that basis, we go before the W.T.O. and bring an action against them as a currency manipulator. And that allows us to apply tariffs where we believe they are stealing our intellectual property, hacking into our computers, or artificially lowering their prices and killing American jobs. We can’t just sit back and let China run all over us. People say, “Well, you’ll start a trade war.” There’s one going on right now, folks. They’re stealing our jobs. And we’re gonna stand up to China.

The theory goes that by buying U.S. currency (so far they have accumulated around $3 trillion) and treasuries (around $1 trillion) on the open market, China keeps demand for the US dollar high.  They can afford to buy and hold so much US currency due to their huge trade surplus with America, and they buy US currency roughly equal to this surplus.  To keep this pile of dollars from increasing the Chinese money supply, China sterilises the dollar purchases by selling a proportionate amount of bonds to Chinese investors.  Supposedly by boosting the dollar, yuan-denominated Chinese goods look cheap to the American (and global) consumer.

First, I don’t really think we can conclusively say that the yuan is necessarily undervalued. That is like assuming that there is some natural rate of exchange beyond prices in the real world. For every dollar that China takes out of the open market, America could print one more — something which, lest we forget — Bernanke has been very busily doing; the American monetary base has tripled since 2008. Actions have consequences; if China’s currency peg was so unsustainable, the status quo would have collapsed long ago. Until it does, we cannot conclusively say to what extent the yuan is undervalued.

What Romney is forgetting is that every nation with a fiat currency is to some degree or other a currency manipulator. That’s what fiat is all about: the ability of the state to manipulate markets through monetary policy. When Ben Bernanke engages in quantitative easing, or twisting, or any kind of monetary policy or open market operation, the Federal Reserve is engaging in currency manipulation. Every new dollar that is printed devalues every dollar out in the wild, and just as importantly all dollar-denominated debt. So just as Romney can look China in the face and accuse them of being a currency manipulator for trying to peg the yuan to the dollar, China can look at past U.S. administrations and level exactly the same claim — currency manipulation in the national interest.

While China’s currency policy in the past 40 years has been to attract manufacturing, technology, resources and investment into China (and build up a manufacturing base to provide employment to its low-skilled population) by keeping its produce cheap, America’s currency policy has sought to enjoy a free lunch made up of everyone else’s labour and resources. This has been allowed to develop because of America’s reserve currency status — everyone has needed dollars to access global markets, and so America has rested on her laurels and allowed her productive industries to decline. Why manufacture the bulk of your consumption when China can do it cheaper, and Wal Mart has no problem with slave labour? Why manufacture your military hardware when China can do it cheaper? Why produce your own energy when you can instead consume Arab and Latin American oil?

Former U.S. ambassador Jon Huntsman raised this issue in an article from China Business News in a cable that was eventually leaked via Wikileaks:

The U.S. has almost used all deterring means, besides military means, against China.  China must be clear on discovering what the U.S. goals are behind its tough stances against China. In fact, a fierce competition between the currencies of big countries has just started.  A crucial move for the U.S. is to shift its crisis to other countries – by coercing China to buy U.S. treasury bonds with foreign exchange reserves and doing everything possible to prevent China’s foreign reserve from buying gold.

 

If we use all of our foreign exchange reserves to buy U.S. Treasury bonds, then when someday the U.S. Federal Reserve suddenly announces that the original ten old U.S. dollars are now worth only one new U.S. dollar, and the new U.S. dollar is pegged to the gold – we will be dumbfounded.

Today when the United States is determined to beggar thy neighbor, shifting its crisis to China, the Chinese must be very clear what the key to victory is.  It is by no means to use new foreign exchange reserves to buy U.S. Treasury bonds.  The issues of Taiwan, Tibet, Xinjiang, trade and so on are all false tricks, while forcing China to buy U.S. bonds is the U.S.’s real intention.”

Romney and others of his ilk might brush this off, believing that China’s $3 trillion dollar reserve hoard was gained through unfair means — slave labour, cutting corners in quality, the aforementioned “currency manipulation”, etc, and that that somehow gives America the right to inflate away its debts and screw its creditors. To some degree, they have a point. If China had a problem with America inflating away its debts, it should never have put itself so deep into dollar-denominated paper. If China recognised that America’s debt position was unsustainable, it should never have put so much into something so unsustainable, irrespective of supposed American pressure.

In the short term, though, I think escalating the trade war through the imposition of tariffs is a very bad idea. America is a consumption-led economy, and with middle class incomes already squeezed, a constriction of the supply of cheap and readily available goods is likely to put a lot of downward pressure on consumption. And it’s not just consumption — in today’s hyper-globalised world, a huge proportion of manufacturing — including military hardware — at some stage flows through China.

As Vincent Fernando noted:

Most of America’s key military technologies require rare earth elements, whose production China holds a near-monopoly over.

 

It’s thus perhaps no surprise that China has made the threat of rare earth export restrictions a new political bargaining chip.

American corporations could gradually pull out of China and shift to manufacturing and extracting resources elsewhere including America (which has large rare earth deposits), but it would be a challenging process. Rebuilding an industrial base is hard: skilled and experienced labour takes time to develop (American labour is rusty and increasingly unemployed and disabled), and supply chains and webs have all agglomerated in China. Building up domestic supply chains takes time, expertise and entrepreneurial zeal. And any destabilisation could spook global markets.

So let’s make no mistake: in the short term America needs China far, far, far more than China needs America. The notion that China needs America as a consumer is totally false; anyone can consume given the dollars or gold, and China holds $3 trillion, and continues to increase its imports of gold.

Peter Schiff summarises:

The big problem for countries like China and India is that they still subsidize the U.S. They buy our Treasury bonds and lend us all this money so we can keep consuming. That’s a big subsidy and a heavy burden.

 

They can use their money to develop their own economy, produce better and more abundant products for their own citizens. It’s a farce to think that the only thing China can do with its output and savings is lend it to the U.S. government, especially when we can’t pay it back.

Mitt Romney seems intent on destabilising this fragile relationship. American policy that incentivised globalisation and the service economy has very foolishly drawn America into this fragile position where its economy is increasingly fuelled not only by energy coming out of the politically and economically unstable middle east, but also by goods coming from a hostile and increasingly politically and economically unstable power.

And make no mistake — although China has done well to successfully transform itself into the world’s pre-eminent industrial base and biggest creditor, it has a lot of bubbles waiting to burst (particularly housing), stemming from the misallocation of resources under its semi-planned regime. Which makes this entire scenario doubly dangerous. Any shock in China would surely be transmitted to America, simply because it is becoming increasingly pointless for China to continue subsidising American consumption (through buying treasuries) when they could instead spend the money raising the Chinese standard of living. That could mean a painful rate-spike.

The real problem is that Romney is trying to address a problem that is very much in the past. If Romney was elected as President on this platform in 2000, things might be different. But China got what it wanted: by keeping its currency cheap and its labour force impoverished it became the world’s pre-eminent industrial base, the spider at the heart of the web of global trade, and a monopoly on important industrial components and resources. China used American demand, technology and investment during the 00s to develop. Now the imperative is not to grab a bigger share of global manufacturing, or a bigger hoard of dollarsit’s to leverage that position toward the ultimate aim of returning China to its multi-millennial superpower status. The promise of Chinese primacy is quite simply the strongest tool for the CPC to retain its (increasingly shaky) grip on China.

However we should not discount the possibility that bursting economic bubbles may stoke up some kind of popular rebellion against the Communist authorities in some kind of Chinese Spring. A new more pro-Western regime is surely America’s best hope of containing China, while gradually manoeuvring itself out of dependency on Arab oil and Chinese goods. But that may just be wishful thinking; it is possible that a new Chinese regime may be vehemently anti-Western; the Opium War and China’s 20th century humiliation still ring deeply in the Chinese psyche.

So it is unclear what is next for China, and the relationship between China and America. But having the world’s biggest manufacturing base and a monopoly over rare earths is a strong position to be in if your ultimate aim is to manufacture huge quantities of armaments in the pursuit of an aggressive, expansionist foreign policy…

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Wed, 05/09/2012 - 13:48 | 2410520 Divided States ...
Divided States of America's picture

No, we are.

Wed, 05/09/2012 - 13:55 | 2410533 Colombian Gringo
Colombian Gringo's picture

Romney is a new world order hack, marching to his masters commands.

 

Romney Obama, Obama Romney, Romama, Obamney,  Left/Right, same shit from a common asshole,  just separate piles.

Wed, 05/09/2012 - 13:58 | 2410565 tarsubil
tarsubil's picture

I'm not sure Romney is as much a hack or stooge as Obama. Perhaps, Obama is to Romney what Nixon is to Poppy Bush?

Wed, 05/09/2012 - 14:07 | 2410610 Popo
Popo's picture

Define "currency manipulator".   

Isn't any nation with a central bank and a fiat currency a currency manipulator?

Wed, 05/09/2012 - 14:11 | 2410625 redpill
redpill's picture

Of course.  But even if Romney knows what it means, he doesn't really care.  Truth is irrelevant in politics.

Wed, 05/09/2012 - 14:22 | 2410692 Dr. Richard Head
Dr. Richard Head's picture

Agreed.  It is a part of the boogeyman lexicon that scares the Romney out of the sheep.

List of Pavlovian key words (update as necessary)

-          Terror, terrorists

-          Currency Manipulators

-          Underwear bomb

-          Iran Nuclear bomb

-          Speculators

-          Muslims

 

Wed, 05/09/2012 - 14:31 | 2410722 Titan Uranus
Titan Uranus's picture

Racist

Rich

White/Hispanic

Woman Hater

Unpatriotic

Uncaring

Wed, 05/09/2012 - 14:32 | 2410728 Sauk Leader
Sauk Leader's picture

I want to know where this even came up! The Obama Re-elect media I am sure has no fucking clue what he's talking about, just calling Wall St. to see if this is something they can use against him. Focus on the issues Romney, Gay Weddings, Student Loans and Trayvon.

Wed, 05/09/2012 - 14:15 | 2410645 HarryM
HarryM's picture

The public digs the tough talk on china.

Someone to blame

Trump was getting a lot of positve feedback when he attacked them.

The best is look what the Fed is doing - ie today - looks like we may go green on 2 indexes , and they call China a manipulator

Wed, 05/09/2012 - 15:05 | 2410913 mickeyman
mickeyman's picture

No, by definition the US is not a currency manipulator :)

Wed, 05/09/2012 - 14:10 | 2410619 Dr. Richard Head
Dr. Richard Head's picture

People who attach to the Romney campaign are the stooges, as they accept the fact value of this man's obvious lies and disinformation (Obama as well) and believe that putting their R team horse or their D team horse in will make one horse hair worth of difference. 

Wed, 05/09/2012 - 14:00 | 2410575 NotApplicable
NotApplicable's picture

He had me right up until he said,

"Mitt Romney thinks"

LOL, yeah right!

Wed, 05/09/2012 - 15:41 | 2411049 CrashisOptimistic
CrashisOptimistic's picture

Romney may not have pure motives, but unlike Obama he actually understands money.  He has an MBA and a law degree from Harvard.  blah blah blah his finance credentials.

You already know all this.  His resume is superior, regardless of ideology.

Wed, 05/09/2012 - 16:00 | 2411149 blunderdog
blunderdog's picture

But Obama's been President and kept us safe from terrists since he was swore in!  Mittens ain't done anything as great as that.

(You were joking, right?)

Wed, 05/09/2012 - 14:13 | 2410640 Ookspay
Ookspay's picture

lemme guess Gringo, everyone but Ron Paul is a Bilderberger NWO plant and lackey, right? Shheeesh!

Romney is not my dream candidate, but he will do. A POTUS with a financial background, may not be all bad. He seems to get the China currency manipulation game, no?

The markets will take off like a rocket as soon as Romney is elected or even pulls way ahead in the polls. There is a lot of pent up "exhuberance" waiting to be "irrational" again...

Wed, 05/09/2012 - 14:16 | 2410649 Dr. Engali
Dr. Engali's picture

You forgot your sarc disclosure. If you're not careful people might think you're serious.

Wed, 05/09/2012 - 14:26 | 2410707 Bay of Pigs
Bay of Pigs's picture

Green arrows for heavy <sarc>

Always...

Wed, 05/09/2012 - 14:34 | 2410749 Ookspay
Ookspay's picture

Oops, sorry Doc, forgot... Of course I will vote for Obama/Biten 2012, what else could possibly go wrong?

Wed, 05/09/2012 - 14:33 | 2410745 DavidPierre
DavidPierre's picture

Ookspay... in his own words:

Biography:

"hi skewl drop owt, dum an ugli to! i lik wine wemin an wiff! gunz and wisky plus redbul also i think good! realijus to, whin i wunt stuf frum God i prey. plese led me be zeero hedge passwurd gitter, i not rite dum stough to much alot, okey?"


A 10 week old MORON!

 

Wed, 05/09/2012 - 14:45 | 2410815 Ookspay
Ookspay's picture

it okey daved. yu can mak fun ov mi wen yer kidz not arownd... plez teech me to bee smort n funy lik yu! i giv gren arow to giv yu mor valu!

Wed, 05/09/2012 - 22:47 | 2412052 monoloco
monoloco's picture

A lot of right fart smellers here tonite.

Wed, 05/09/2012 - 15:04 | 2410901 resurger
resurger's picture

"the markets will take off like a rocket as soon as Romney is elected or even pulls way ahead in the polls. There is a lot of pent up "exhuberance" waiting to be "irrational" again....."

 

Hope Fuel Rockets.

Wed, 05/09/2012 - 15:11 | 2410927 Ookspay
Ookspay's picture

Ahh, I remember hope. But who cares what fuels the rocket, lips are lips.

Wed, 05/09/2012 - 14:22 | 2410693 El Oregonian
El Oregonian's picture

Obamney 2012!!!

Wed, 05/09/2012 - 15:32 | 2411003 williambanzai7
williambanzai7's picture

FLIP ROMNEY

Wed, 05/09/2012 - 16:05 | 2411044 Aziz
Aziz's picture

nice work 

by the way I am gonna write an article on Bernanke and Obama's gay marriage, you got any suitable pics?

Wed, 05/09/2012 - 14:06 | 2410598 MarkS
MarkS's picture

So are you saying that China is not a currency manipulator?  Of course they are.  What do you think the peg is all about?  Why do you think they widened it when the $US started rising against the Euro$, so they could appreciate faster?  NO, they widened the band so that they could keep it from rising and making their goods increase in price in their biggest export market.

Yes, we are a currency manipulator and so is every other nation that can manipulate their currency.  Why the hell wouldn't you manipulate your currency if had the opportunity to strengthen your trading position?  Especially, if there was no likely punishment for doing so.    

 

Wed, 05/09/2012 - 14:11 | 2410627 Dr. Richard Head
Dr. Richard Head's picture

Why wouldn't a country manipulate its currency?  To benefit the people of course and to increase their purchasing power.  Then again the self interests of the status quo would suffer and we wou;dn't want that now would we?

Wed, 05/09/2012 - 14:49 | 2410833 Kayman
Kayman's picture

"So let’s make no mistake: in the short term America needs China far, far, far more than China needs America."

Make no mistake without China, America is wounded but will survive.  Without Western export markets for their shit products, without unlimited pollution of the atmosphere, China is dead.

America will rue the day our myopic financial criminals and corporate ostriches built up the China monster.  Nazi Germany and Imperialist Japan would have wet their panties, if they had the American investments in their plant and equipment.

Cheap crap for America is more than offset by the loss of good jobs.

 

Wed, 05/09/2012 - 15:06 | 2410912 FreedomGuy
FreedomGuy's picture

First, trade deficits are an illusion. China gets our money but we get their "stuff". The trade is even. If you looked at the flow of goods we get way more stuff than they do so they run a trade deficit in goods.

Additionallly, if they prop up the value of the dollar it raises the price of commodities like oil to them and reduces our relative price.

Ben Bernanke artificially raises the demand for treasuries by purchasing over half the issues. We all play with currencies but it is a great tactic for an election year. We got to economic war and even real war based on false theories and fake bad guys.

Wed, 05/09/2012 - 14:18 | 2410667 Gully Foyle
Gully Foyle's picture

Don't any of you people work?

If so how many are fucking off on company time?

 

Wed, 05/09/2012 - 15:09 | 2410824 Umh
Umh's picture

I'm retired. So how about you. Are you browsing on the company dime?

 

 

Wed, 05/09/2012 - 15:01 | 2410888 Dr. Richard Head
Dr. Richard Head's picture

It's called multi-tasking.

Thu, 05/10/2012 - 03:34 | 2412424 rotagen
rotagen's picture

I don't ever want to see the words Mitt Romney and Theory together in the same sentence....geeze.  Might as well listen to any other christian moron talk about the history of the earth.

Wed, 05/09/2012 - 13:51 | 2410531 Memphis10
Memphis10's picture

Who isn't? Thats what I say! HAHA! Just gotta traverse the markets cunningly, thank god for liquidity and dumb money.

Wed, 05/09/2012 - 14:09 | 2410622 SheepDog-One
SheepDog-One's picture

Romney says 'Pull my finger'!

Wed, 05/09/2012 - 13:50 | 2410535 buzzsaw99
buzzsaw99's picture

Romney = scumbag.

Wed, 05/09/2012 - 14:53 | 2410841 Kayman
Kayman's picture

Yeah, Buzz.  Great choice- Scrumbag or Scum-sucking bottom feeder.

Wed, 05/09/2012 - 15:00 | 2410886 resurger
resurger's picture

I cant believe you got 5 Junks buzz = 5 idiots

Wed, 05/09/2012 - 15:32 | 2411016 GeneMarchbanks
GeneMarchbanks's picture

At least five plan on voting for the 'lesser of two evils'. Am I right, tards?

Wed, 05/09/2012 - 14:00 | 2410536 hedgeless_horseman
hedgeless_horseman's picture

 

 

It 's different when we do it, just like nuclear weapons, murder, torture, tariffs, and state controlled propaganda. 

The U.S.A. is exceptional! 

Wed, 05/09/2012 - 13:50 | 2410537 LawsofPhysics
LawsofPhysics's picture

Would the list be shorter if you simply asked what country isn't manipulating their currency?

Wed, 05/09/2012 - 13:58 | 2410566 DOT
DOT's picture

{   }

Wed, 05/09/2012 - 14:04 | 2410599 JR
JR's picture

The Euro Zone downturn has been exacerbated by the common currency.

The Economist in July 2011: “Despite a relatively small primary deficit projected for this year, Greece is peculiarly vulnerable because of the scale of its indebtedness and the fact that so big a chunk of it is held abroad, a characteristic also shared by Ireland and Portugal, the two other bailed-out countries. As important, in joining the single currency, these economies lost the ability to reduce debt by inflation and to spur growth and competitiveness through devaluation. That makes investors fear that the only way to relieve oppressive debt burdens is through default…”

http://www.economist.com/blogs/dailychart/2011/09/government-debt?page=1

Wed, 05/09/2012 - 13:55 | 2410550 carbonmutant
carbonmutant's picture

Is the FED manipulating Equities markets?

Is the Pope Catholic?

Is this a trick question?

Wed, 05/09/2012 - 14:04 | 2410590 NotApplicable
NotApplicable's picture

All your cakes and efforts to defend them are belong to us!

Gee, must be an election year.

Wed, 05/09/2012 - 14:22 | 2410695 Marco
Marco's picture

Bake sale ban = ban on selling cookies in schools ...

Do NOT follow this link or you will be banned from the site!