|Guest post by Peter Morici
“The fact is nothing the Fed does can appreciably accelerate U.S. economic recovery or stem deflation as long as China continues to print yuan, buy dollars and U.S. securities, and make its products woefully cheaper than its comparative advantage warrants in the United States and Europe.”
Through the boom years of the last decade, Beijing printed yuan to purchase hundreds of billions of dollars in foreign exchange markets. That made the yuan and Chinese products on U.S. store shelves artificially cheap, and imports from China, coupled with higher prices for imported oil, pushed the U.S. trade deficit to more than five percent of GDP from 2004 to 2008.
When Americans spend that much more abroad than foreigners purchase in the United States, American goods pile up in warehouses and a steep recession will result, unless Americans spend much more than they earn or produce.
During the boom, China facilitated such folly by using its dollars to purchase U.S. Treasury securities, and that kept U.S. long interest rates artificially low, even in the face of Federal Reserve efforts to reign in spending.
From 2003 to 2006, easy terms prevailed on mortgages, homeowner lines of credit, car loans, and credit cards even as the Fed raised the federal funds rate. Americans borrowed against their homes, pushed real estate prices to unreasonable levels, and spent on Chinese goods at Wal-Mart until the credit bubble burst in late 2007 and 2008.
China continues to recklessly print yuan to buy dollars and U.S. Treasuries, and all those yuan are creating inflation and real estate speculation in China that Beijing can’t contain.
With the dollar still overvalued by some 40 or 50 percent against the yuan, the U.S. trade deficit with China, and other Asian countries practicing similar currency mercantilism, is growing again. This deficit saps demand for U.S. goods and services, slows U.S. recovery, and suppresses U.S. land values and fuels fears of deflation in the United States, even though the U.S. banking system is flush with cheap credit from the Fed.
The fact is nothing the Fed does can appreciably accelerate U.S. economic recovery or stem deflation as long as China continues to print yuan, buy dollars and U.S. securities, and make its products woefully cheaper than its comparative advantage warrants in the United States and Europe.
Coupled with its high tariffs and administrative barriers to imports on anything the Chinese can make themselves, no matter how awkwardly or inefficiently, Beijing is hogging growth and jobs, and spreading unemployment and budget misery among workers and governments from Sacramento to Athens.
This past weekend, Beijing announced it will permit some more exchange rate flexibility but we have heard those words before. China will likely permit the yuan to rise slightly against the dollar-much less than six percent a year-while the true value of the yuan rises much more, thanks to Chinese modernization and productivity improvements.
China’s announcement is a cynical ploy to assuage critics less than a week before G20 meetings, and without a substantial one-off revaluation of the yuan, Beijing’s words are hypocritical and selfish.
China’s yuan policy makes the Fed nearly irrelevant but for crisis management-bailing out big banks and European governments that make fatal mistakes.
Worse, President Obama’s failure to take strong action against Chinese currency manipulation-for example, a tax on dollar-yuan conversion to make the price of Chinese products reflect their true underlying cost-crippled the jobs creation effectiveness of his $787 billion dollar stimulus package and delivers ineffective his broader efforts to resurrect the U.S. economy.
Obama’s exclusive reliance on diplomacy forfeits U.S. monetary policy to Beijing, renders impotent U.S. fiscal policy, and visits enormous pain on American workers.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.
Guest Post by Peter Morici, Professor and former Chief Economist, US Trade Commission.
The Washington Post reported on Friday morning that Treasury Secretary Timothy Geithner and Chinese Vice Premier Wang Qishan were close to a deal that would permit the Chinese yuan to appreciate by 3 percent this year.
This is wholly inadequate and would do little to resolve the U.S.-China trade imbalance, which was $227 billion in 2009 and 60 percent of the total U.S. trade deficit. The balance was largely oil.
China’s yuan is likely overvalued by 40 percent, and Beijing accomplishes this by printing yuan and selling those for dollars to augment private transactions. In 2009, those purchases were $450 billion or about 10 percent of its GDP and 28 percent of its exports of goods and services.
The U.S. trade deficit with China and on oil causes a shortage of demand for U.S. made goods and services and stifles investment in U.S. export industries, which are the most productive and R&D-intensive industries.
In 2010, the trade deficit with China is reducing U.S. GDP by more than $400 billion or nearly three percent. Unemployment would be falling rapidly and the U.S. economy recovering more rapidly but for the trade deficit with China and Beijing’s currency policies.
Longer term, China’s currency policies reduce U.S. growth by one percentage point a year. The U.S. economy would likely be $1 trillion larger today, but for the trade deficits with China over the last 10 years.
A three percent revaluation of its currency will do little to change those numbers. In fact, because of Chinese modernization, the intrinsic value of China’s currency rises each year. Hence, a three percent revaluation over the next year would not even amount to the change in yuan undervaluation.
As the U.S. trade balance with China grew worse, Beijing could say “see exchange rates don’t matter.”
Beijing is playing the Obama Administration for fools.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.
A tentative agreement reached between the U.S. and Canada would provide Canadian suppliers access to state and local public works projects under the American Recovery and Reinvestment Act of 2009. At the same time, US suppliers will now have access to provincial, territorial, and municipal supply contracts in Canada.
Originally, the Buy American provisions of the ARRA had mandated that all steel and manufactured goods purchased with the stimulus funds be made in the United States or in countries with U.S. agreements on government procurement. Local-level projects were also mostly confined to U.S.-made goods.
Canadian Officials contested these provisions, despite Canada’s exclusion of US suppliers from bidding on provincial and territorial supply contracts.
Guaranteed Reciprocal Access
According to the february 5, 2010 agreement, Ottawa will also provide U.S. suppliers with access to construction contracts across its provinces and territories, as well in as a number of municipalities – a breakthrough according to US officials.
“This administration made clear to Canada from the outset that any agreement to provide Canada with expanded access to U.S. procurement absolutely must provide guaranteed reciprocal access for US exporters to supply goods and services to Canada through provincial and territorial procurement contracts,” USTR Ron Kirk, the top U.S. trade official, said. “USTR has won that access for American firms, and I look forward to signing the agreement soon,” he said. “The value of new job-supporting contracts open to US firms will be tens of billions of dollars.”
Nice to see that win-win based on mutual respect and mutual opportunity can be the basis of trade. Trade doesn’t just have to be beggar thy neighbor.
Hey Kirk, how about taking that line of reasoning to Beijing?
US Canada Joint Statement.
Infrastructure Photo Credit.
Capt. Kirk Photo credit.