U.S. Currency War with China?

This short piece is on News Hour introduces us to the politics of currency manipulation. A government who keeps its currency artificially low is in essence dumping their goods and services on every other country, thereby taking jobs from those countries.   The hard part is determining when prices are really artificially low.  While it is in the end a political opinion, we have some hints as to when the price of a currency is really lower than it should be.  One of those is when per-capita income is higher than another country’s and yet there is still a net export of goods and services.  According to the International Monetary Fund, for 2010, the U.S. had the 7th highest per capita income of $46,860, while China came in a distant 94th with $7,544 per person.  China’s trade surplus for that same year was $190 billion.  Were we to attribute all of that to the United States, that would add about $680 to the U.S. per capita income.

On the other hand, Perhaps, on the other hand, the U.S. currency is too high. After all, the U.S. trade deficit for 2010 was $498 billion.  But then what do we do about it? To lower the value of the dollar you simply print more. Of course that risks inflation. And if you do print more, why shouldn’t another country respond by printing more of its own currency?

It’s a messy business, and given the amount of money to be made or lost in speculating on currency, the U.S. Senate should be very careful about the sort of laws they pass, particularly ones that in some way ties the Treasury Department’s arms in dealing with currency crises.  Thar be dragons here.

 

[del.icio.us] [Digg] [Facebook] [Reddit] [Twitter]