March 15, 2005


Our Currency, Your Problem (NIALL FERGUSON, 3/13/05, NY Times)

Why are the Chinese monetary authorities so willing to underwrite American profligacy? Not out of altruism. The principal reason is that if they don't keep on buying dollars and dollar-based securities as fast as the Federal Reserve and the U.S. Treasury can print them, the dollar could slide substantially against the Chinese renminbi, much as it has declined against the euro over the past three years. Knowing the importance of the U.S. market to their export industries, the Chinese authorities dread such a dollar slide. The effect would be to raise the price, and hence reduce the appeal, of Chinese goods to American consumers -- and that includes everything from my snowproof hiking boots to the modem on my desk. A fall in exports would almost certainly translate into job losses in China at a time when millions of migrants from the countryside are pouring into the country's manufacturing sector.

So when Treasury Secretary John Snow insists that the United States has a ''strong dollar'' policy, what he really means is that the People's Republic of China has a ''weak renminbi'' policy. Sure, this is bad news if you happen to be an American toy manufacturer. But there are three good reasons that the administration is tacitly delighted by the Asian central banks' support. Not only is it keeping the lid on the price of American imports from Asia (a potential source of inflationary pressure). It is also propping up the price of U.S. Treasury bonds; this in turns depresses the yield on those bonds, allowing the federal government to borrow at historically very low rates of interest. Reason No. 3 is that low long-term interest rates keep the Bush recovery jogging along.

Sadly, according to a growing number of eminent economists, this arrangement simply cannot last. The dollar pessimists argue that the Asian central banks are already dangerously overexposed both to the dollar and the U.S. bond market. Sooner or later, they have to get out -- at which point the dollar could plunge relative to Asian currencies by as much as a third or two-fifths, and U.S. interest rates could leap upward.

And go where? Into their own economies, which they'd be plunging into recession if they priced themselves out of U.S. markets, or into Europe, which is already in a recession it's unlikely to get out of?

Posted by Orrin Judd at March 15, 2005 7:42 AM

I would not be too worried by an author who doesn't know that the Chinese currency is the Yuan. Renminbi means something like "exchange rate."

And China is getting in exchange something of great value--an excuse not to carry through on their threats to invade Taiwan, which presumably has the means to mine thir harbors and stop the "export-based economy" altogether.

Posted by: John Weidner at March 15, 2005 9:59 AM

if they invaded Taiwan, those $6*10^11 of T-bonds would become scrap electrons. They know that.

If you owe the bank a thousand dollars you have a problem, If you the bank a million dollars, the bank has a problem. Imagine what its like if you owe the bank a trillion dollars.

Posted by: Robert Schwartz at March 15, 2005 11:03 AM

Renminbi v. yuan - I'll be darned. Google gives about 2 million hits on "China yuan" and only about 372,000 on "China renminbi"; however, there are plenty of "renminbi" hits for articles clearly using it as a currency.

Maybe it is a Brit thing.

Posted by: Tom Maguire at March 15, 2005 12:05 PM