You know things are bad when the Chinese lecture you about free market economics. Recall the laughter Geithner received from Chinese students five months ago when he assured them that their dollar-based assets were secure. Well, the following appeared in this morning’s Wall Street Journal:
Liu Mingkang, chairman of the China Banking Regulatory Commission, said that a weak U.S. dollar and low U.S. interest rates had led to “massive speculation” that was inflating asset bubbles around the world. It has created “unavoidable risks for the recovery of the global economy, especially emerging economies,” Mr. Liu said. The situation is “seriously impacting global asset prices and encouraging speculation in stock and property markets.” Early Monday, a spokesman for China’s Ministry of Commerce added further criticism of the Obama administration, targeting recent measures by Washington against Chinese exports. “We’ve always known the U.S. and the West as free market economies. But now we’re seeing a protectionist side,” the spokesman, Yao Jian, told a monthly press briefing. Mr. Yao also rejected criticism of China’s currency policy, saying the yuan’s exchange rate has little to do with trade imbalances with the U.S. and that China should keep the exchange rate stable.
Liu Mingkang must have ready my post last week on the state of the economy. The Fed is keeping interest rates too low (below market rates), encouraging risky and otherwise questionable investments that would otherwise not be made. Our economy should be adjusting to the recession by allowing the transfer of capital from less productive enterprises to more productive ones. Instead, the Obama administration and the Dems in Congress are spending massive amounts to control the economy and discourage this regenerative process. It’s a blend of Keynesian economics and Marxism that even perplexes the Chinese.
I don’t agree with the Chinese position on the yuan’s exchange rate. The weak dollar is supposed to be good for exports in the short run, but has little effect on trade with countries like China whose currency value is largely tied to the dollar anyway. We can’t really lecture the Chinese on letting the market determine currency exchange rates when we are attempting to control the market in every other respect. Either the market works or it doesn’t.
The problem is really bigger than this. The U.S. is no longer the standard for free market economics. We’ve traded our moral authority and influence in the world for “change we can believe in.” I just hope we can keep a lid on the current socialist experiment until the 2010 elections.
Maybe this Liu guy should run for President in the U.S. At least he has a little common sense.
He wouldn’t win the democrat primary–too conservative. Seriously, this should be a real shock. Who would have thought that anyone, especially the Chinese, would ever lecture us on the free market?
i don’t understand the connection between exchange rates and exports…
When exchange rates change, then the cost of imported and exported goods change as well. For example, if one dollar is worth 8 Chinese yuan, then a piece of machinery worth $1000 would cost a Chinese buyer 8000 yuan. If the US dollar weakens and the exchange rate changes to 7 Chinese yuan (roughly the current value), then the Chinese buyer could by the same piece of machinery for only 7000 yuan. This would make U.S. exports more attractive to Chinese buyers, while the reverse would be true for Chinese exports to the U.S. They would be more expensive in terms of dollars, and fewer would be sold. In the short run, this means that a weak dollar would lower the U.S. trade deficit and even “create jobs” in certain industries.
There are 2 problems with this example. First, it assumes that currencies can freely “float” (change values) on global markets. Currencies like the Euro and British Pound can, but others are partially or completely tied to the U.S. dollar and will not shift as much because of global changes. The Chinese yuan is partially linked to the dollar, so changes in the dollar-yuan exchange rate have not been as great as they would have been if both currencies were traded freely and without Chinese government interference on world markets.
Second, in the long run a weaker dollar creates other problems. It is inflationary because much of what we buy is from other countries. This increases wages and other economic costs, thereby raising the costs of the exports that were initially reduced. These side effects work against the initial benefit of a weak dollar, essentially cancelling it out at some point. Some economists actually want to see a weak dollar because of an initial boost in exports, but they fail to consider that the long term effects work in the opposite direction.
The bottom line is that a weak dollar can boost exports and reduce imports in the short run, but may have no effect (or possibly an opposite effect) in the long term.
Obama is flapping his gums about the debt/deficit right now on the radio, lol….i guess now that he’s paid off all his cronies with a trillion $$$ in pork its time to cut some spending….what a fraud…if the dems lips are moving, they’re lying…