Commentary Magazine


Contentions

Currency Wars

This morning, the New York Times advised China to rebalance its economy, shifting it away from exports and toward domestic consumption. “Consumer spending amounts to little over a third of economic production, probably the lowest share in any country in the world,” the paper notes.

The Times is certainly correct in both its assessment of the current woes of the Chinese economy and its proposed cure. For years, American Treasury secretaries, Fed chiefs, and economists have been trooping to Beijing to tell China’s technocrats this. Everyone knows foreigners have been giving excellent advice, but China’s political leaders have been reluctant to accept it. Under intense outside pressure, in July 2005 they allowed their currency, the renminbi, to appreciate by permitting a “dirty float.” In other words, they allowed the yuan, as it is also known, to fluctuate in value within tightly managed trading bands. As a result, the Chinese currency has gone up in value. This year it has appreciated 7.3 percent against the dollar.

Then came July, when the gains against the dollar stopped. July is also the month that the ruling Politburo switched gears, dropping its fight against persistent inflation and starting a campaign to stimulate growth by promoting exports. Any program to help exports will inevitably depress imports and consumption. In short, China’s political leaders rejected the good advice from the New York Times months before today’s editorial saw the light of day.

And why do we care if Beijing is taking steps that will ultimately cause even more damage to its economy? By artificially depressing the value of their currency, Chinese leaders are trying to obtain a trade advantage by making their exports cheaper than they would otherwise be. In the past, China’s competitors–especially Thailand, South Korea, and Japan-took only minor steps to counteract Beijing’s currency moves by directly or indirectly fiddling with their currency values. In a time of synchronous economic failure, however, nations are bound to rethink the system of freely floating currencies. Just as bad currencies drive out good ones–that’s Gresham’s Law–selfish currency policies undermine responsible ones.

If Beijing persists in its irresponsible currency policy, other nations will stop being exemplary global citizens and begin to rig theirs as well. Competitive devaluations are one way to start a worldwide depression. At a time when almost every economy is fragile, leaders in the West need to tone down counterproductive calls for planetary regulation and begin speaking about the real danger to common prosperity.


Join the discussion…

Are you a subscriber? Log in to comment »

Not a subscriber? Join the discussion today, subscribe to Commentary »





Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor to our site, you are allowed 8 free articles this month.
This is your first of 8 free articles.

If you are already a digital subscriber, log in here »

Print subscriber? For free access to the website and iPad, register here »

To subscribe, click here to see our subscription offers »

Please note this is an advertisement skip this ad
Clearly, you have a passion for ideas.
Subscribe today for unlimited digital access to the publication that shapes the minds of the people who shape our world.
Get for just
YOU HAVE READ OF 8 FREE ARTICLES THIS MONTH.
FOR JUST
YOU HAVE READ OF 8 FREE ARTICLES THIS MONTH.
FOR JUST
Welcome to Commentary Magazine.
We hope you enjoy your visit.
As a visitor, you are allowed 8 free articles.
This is your first article.
You have read of 8 free articles this month.
YOU HAVE READ 8 OF 8
FREE ARTICLES THIS MONTH.
for full access to
CommentaryMagazine.com
INCLUDES FULL ACCESS TO:
Digital subscriber?
Print subscriber? Get free access »
Call to subscribe: 1-800-829-6270
You can also subscribe
on your computer at
CommentaryMagazine.com.
LOG IN WITH YOUR
COMMENTARY MAGAZINE ID
Don't have a CommentaryMagazine.com log in?
CREATE A COMMENTARY
LOG IN ID
Enter you email address and password below. A confirmation email will be sent to the email address that you provide.