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 percentagainst 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. Photocredit
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. Sucker.
I received an email from a trusted colleague that had a letter attached describing the writers frustration with outsourcing.
Here at pmpaspeakingofprecision. com, we are all about people making things to make our world safer and our lives better. So when we read this letter describing one engineers frustration when trying to do exactly that, well, we asked for permission to share it with you.
The writer, a maritime design engineer, is trying to source wheel fenders so that hulls of “80,000 DWT” oil tankers don’t rupture when contacting a fixed surface of the dock. It really matters, when “The potential impact of failure is 2000 years” if the hull tears. This post takes some highlight’s from that letter. Guest post by Vitaly Feygin
My name is Vitaly Feygin. I am a Structural Engineer, not a writer, but I urge you to read this post.
Like many immigrants I came to this great country 20 years ago. Twenty years ago we all were shocked to discover the prosperity of this country and how much this country achieved using competition of small and medium size businesses.
Today, I want to ask you: “Where is that competition? Where are professionals and skilled craftsmen who made this country?”
Instead of professionals who are doing and managing their work and are proud of what they were doing, we developed a gang of MBA (Masters of Business Administration) who mastered bureaucracy, who have not created anything but hurdles for those who could work. What these MBA have done to us- they sold us out.
Doing nothing, their only significant task was to sell our work to countries like China or India. That is the “real” Business Administration. Here is an example.
I am a Maritime Structural Engineer. In our business we are quite frequently use special rubber fenders that protect ships from destruction during dock operations. Five years ago there were 5 companies producing these fenders in US. Today there is only one company, and after that company swallowed all her competitors they moved manufacturing facilities to where? You are right, to China.
We became a nation that sells to each other Chinese products- products that are produced in Communist China at a time when millions of US workers are without work and with no means to support themselves. Go to any store and try to find any merchandise that is produced in this country. You will find none.
We are discussing Health Reform with whom? With destroyed small and medium size businesses who cannot compete with subsidized Chinese labor.
More than half of the 763,000 jobs lost in the first two quarters of 2008 were lost in small firms, and unincorporated self-employment fell from an average of 10.4 million in 2007 to an average of 10.1 million in 2008—9.6 million by November and December.