Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

China Trade War Threat, Who's Fault is it?

Politics / Global Economy Jun 11, 2010 - 05:42 AM GMT

By: Mike_Shedlock

Politics

Best Financial Markets Analysis ArticleCongress is one again shaking its currency-manipulation rattle. What's different this time is Geithner appears to be listening.


Please consider Geithner signals U.S. patience waning on China currency.

Treasury Secretary Timothy Geithner indicated U.S. patience on China's currency policy was wearing thin on Thursday as a key lawmaker warned that he would move soon on legislation that would penalize Chinese goods.

Striking his toughest tone on the yuan since delaying a decision in early April on whether to name China a currency manipulator, Geithner told a U.S. Senate hearing Chinese policies had a harmful worldwide impact.

"A stronger renminbi would benefit China because it would boost the purchasing power of households and encourage firms to shift production for domestic demand, rather than for export," he told the Senate Finance Committee.

"The time is long past for any Treasury Department to admit publicly what everyone else already knows, that China is manipulating the value of its currency in order to gain an unfair advantage in international trade," said Charles Grassley, the senior Republican Senator on the committee.

Democratic Senator Charles Schumer told Geithner to "be prepared" because lawmakers would move forward soon with legislation that would slap anti-dumping penalties and countervailing duties on goods from China and other countries with a "fundamentally misaligned" currency.

Senator Graham Threatens Veto-Proof Currency Legislation

Congress is increasingly frustrated with the China's currency peg, so much so that senators suggest there may be enough votes to override a presidential veto. Bloomberg reports Graham Says China Yuan Measure Has ‘Huge’ Support in Congress.

U.S. Senator Lindsey Graham said legislation aimed at getting China to raise the value of its currency has “huge” support in Congress, and President Barack Obama “runs the risk” of being overridden if he vetoes it.

“The frustrations with China’s trade practices are growing by the moment,” Graham, a South Carolina Republican, said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.

He called the measure a “test” of the administration because Obama “campaigned that he would stand up to China currency manipulation.” Graham has joined Senator Charles Schumer, a New York Democrat, in sponsoring legislation targeting China’s yuan.

Lawmakers are pushing for a vote on the Senate floor this month and want Obama to take a harder line on China. Graham has said there is pressure from the administration to stop the measure from moving ahead.

While Treasury spokeswoman Natalie Wyeth declined to comment on Graham’s remarks, Treasury Secretary Timothy Geithner has resisted efforts at trade sanctions in favor of talks that would lead to a higher yuan.

“The distortions caused by China’s exchange rate spread far beyond China’s borders and are an impediment to the global rebalancing we need,” Geithner said in testimony yesterday to the Senate Finance committee.

“It’s very important for China to understand,” that the Schumer-Graham legislation “has very broad support” from Democrats and Republicans, Geithner said.

The Blame Game

OK the US has a trade deficit. Whose fault is it?

For starters much of the US trade deficit is related to oil. Ignoring oil, what about the trade deficit with Asia, in particular China?

In retrospect, some of the blame (arguably most of the blame) belongs on the US for keeping interest rates too low, too long in the wake of the the 2000-2001 recession.

That disastrous policy decision by Greenspan, continued by Bernanke, fueled an enormous borrowing spree culminating in the biggest housing bubble (debt bubble), the world has ever seen.

The global economy is still suffering the consequences of Greenspan and Bernanke's misguided efforts to spur growth by consumer spending.

More importantly, here we are again, except this time there is no housing or commercial real estate bubbles to blow and thus no source of jobs either.

The magic of Accounting Identities

Michael Pettis discuses trade imbalances and who's to blame in The RMB and the magic of accounting identities

One country’s surplus is another’s deficit

If the US runs a capital account surplus, it must run a current account deficit, and if China runs a capital account deficit, the US must run a capital account surplus. This all nicely balances out because if the US runs a current account deficit, China must run a current account surplus.

These things must all happen simultaneously, and there is nothing in the accounting identities that tells us which caused the other.

If PBoC intervention forces a capital account deficit on China, as Krugman says, then all those other things follow automatically. Alternatively, if Americans decided independently to go on a consumption binge that forced the US into a current account deficit, then all these other things must also follow automatically.

Given the sheer size of PBoC intervention, the tremendous concomitant need to sterilize and repress interest rates, and the resistance to appreciate the currency, it seems pretty clear to me that at least part of the reason for PBoC capital exports was as a policy choice.

Now if the initial cause was the PBoC capital exports, of course the Fed could possibly have foiled the capital impact of the PBoC intervention by raising interest rates and forcing up unemployment in the US.

For whatever reason, right or wrong, the Fed didn’t do this.

[Stephen Roach] makes the point “America needs deficit reduction and an increase in personal saving, while China needs to stimulate internal private consumption.”

These are not separate issues. One can only occur with the other, so we are left with the problem of where the original distortion lies and how to resolve it.

[Quoting Stephen Roach] "Some of America’s most prominent economists are claiming that a revaluation of the renminbi vis-à-vis the dollar would not only create more than 1m jobs in the US but that it would inject new vigour into an otherwise anaemic global recovery. Economists should know better. Changes in relative prices are the ultimate zero-sum game – they re-slice the pie rather than expand or shrink it."

He is of course right here. Ignoring the long-term impacts on growth in China and abroad, the currency game is a zero-sum game in the short term. It is a tug of war over employment, and that is exactly why China wants to maintain an undervalued currency and the US and Europe want it to revalue. This also suggests why, for all the recent signs of thawing, this issue is simply not going to go away as long as global unemployment is a problem.

We can resolve this problem concertedly and intelligently with the minimum cost to the global recovery (which means that Germany, Japan, and Europe have to be involved in the adjustment), or we can do so in a series of beggar-thy-neighbor confrontations. It is unlikely that the latter will involve the least cost to the global economy since the whole point of the strategy is not to minimize cost but to push as much of it as possible onto your neighbor.

Regardless of who is to blame (in my view both the US and China), it does not appear this will be resolved in a mutual love-fest. Escalating beggar-thy-neighbor tactics and disastrous tariffs may be just around the bend.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2010 Mike Shedlock, All Rights Reserved.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in