It appears there is a gathering storm of beggar-thy-neighbor currency policies about to blow through. The Wall Street Journal’s Review and Outlook (subscriber content) described the situation in an op-ed today. The essence of “beggar-thy-neighbor” is for an economic system to devalue a currency relative to its trading partners so its exports will be cheaper and thereby demand for them more robust. It’s easy to see that it is impossible for all economic systems try to simultaneously devalue their currencies. Except against fixed metrics. Like internationally-traded commodities. Which is now happening. Copper is at two-year highs. Agricultural commodities have been on a tear. Gold is on a tear as well, but for its potential as a substitute currency.
Our wise leadership has been bashing the Chinese for pegging their currency to the dollar, saying the dollar should be cheaper. This is stupid. The last time we pursued a weak dollar strategy, if unintentionally, was during the seventies, which ultimately ended in a dollar crisis in the early eighties. When the Chinese peg their currency to ours, it simply allows us to determine the value of China’s currency. When we pursue a weak dollar strategy, China pays through the nose for things it must import. Which might explain its race to acquire the raw materials it needs for running its sweatshops factories.
Beggar thy neighbor, if successful, results in the accumulation of piles and piles of foreign currency by the country pursuing the mercantilist strategy. China’s now stands at about 2 trillion dollars. While it’s easy to sterilize (i.e., eliminate the imbalance caused by its existence) a hundred dollars (hide it under the mattress), it is next to impossible to do something similar with two trillion dollars. Imbalances have to be resolved. If the currency of the exporting country is not allowed to appreciate, then it must find something to do with all the reserves it accumulates. In China’s case, a great portion of their reserves flowed back into the United States from whence they came, purchasing everything from treasury bills and notes, to GSE obligations.
In some respects, China fueled the US housing boom of the early and mid-aughts. By funneling the reserves accumulated from selling widgets to the US back into the US housing market (the Chinese also apparently thought that housing prices would never decline), the Chinese helped fuel the boom. But the mechanism by which these surpluses accumulate is the suppression of wages in China relative to the US and elsewhere. If market mechanisms were not tampered with, and if the CCP did not have its boot on the Chinese labor market, Chinese wages would rise and US wages fall until a rough equilibrium between the trading partners was reached. For its part, the US (Federal Reserve) tries to prevent US wages from falling, mostly by keeping prices for everything artificially high, including labor. Imports from China should decrease consumer prices (Wal-Mart price rollbacks) and ultimately labor wage rates, but the Fed is so adamantly wedded to the idea that deflation is bad (which this sort of price reduction isn’t, but the Fed is nothing if not utterly stupid) until it attempts to prevent any prices from ever falling.
But prices are funny things. They don’t much cotton to government manipulation, not even prices for things such as labor. And so Chinese wage rates are climbing, as Chinese labor accumulates market power relative to management at about the same pace the CCP is accumulating foreign reserves. Which makes sense. The foreign reserves are effectively derived from the sweat equity of the laborers. So too, are American wages declining, or they would be, except for stringent laws mandating the minimum permissible wage and benefits allowed. Instead, American workers sit idle, too expensive to employ. But ultimately the rate of unemployment, i.e., the oversupply of labor at present prices, will force a decline in American wage rates.
The higher the pile of foreign currency the PRC and its planation overseer, the CCP, accumulates, the bigger the blast will be when it explodes. And explode it will. The reserves China is accumulating are effectively the result of the CCP’s conclusion that being rich is better than being poor, no matter what ideological flag you fly. It allows only a small amount of the riches it gains as a result of using the Chinese peasant like a plantation slave to trickle down, but it’s a sight more money than they ever saw under the regime’s exercise in governmental stupidity called the Great Leap Forward, where a great many peasants died of starvation. I suppose if you impoverish a people well and truly, then anything they get from there is considered a blessing. At least for a while. But the gig will be up one day when the Chinese peasant cum factory worker realizes that it’s all a rigged game, played for the benefit of the party apparatchiks; that in fact the CCP is running a big plantation, and he is nothing more than a slave. The lesson will come clear when China’s growth falters and she experiences a capitalist-type collapse in demand, such as the industrialized world experienced in the Great Depression. When it happens, the Chinese peasant just might want to put the “People” back into the People’s Republic of China.