It is often repeated by economists, politicians and others that don’t  think, that China’s currency is undervalued relative to the dollar, and its undervaluation is hurting America’s domestic economy. 

But who sets the value of Chinese currency?  Because China more or less pegs its currency to the US dollar, the US Federal Reserve determines the value of a Chinese yuan.  Is that so hard to see?  That if the US wished the Chinese currency to appreciate, it could simply take steps to make US dollars gain in value.  The metric through which such measures could, and should, be measured is the commodities markets, which are all flashing red, so far as the value of a dollar is concerned.  The Chinese are gonna be spending a lot more yuan to buy oil and other necessities if the US Federal Reserve keeps up its quantitative easing, which is intended to decrease the value of dollars, which has been splendidly successful, at least by comparison with internationally-traded commodities.  Or, as Caroline Baum of Bloomberg puts it:

The Fed can print dollars, and those dollars may very well find their way into global commodities prices, emerging debt and equity markets or country-specific goods. That’s not inflation. No matter how many dollars the Fed prints, it cannot affect another country’s inflation unless that country is complicit in increasing its own money supply to prevent its currency from appreciating.

China is making a choice to import inflation. (Actually, in pegging the yuan to the dollar, the PBOC is choosing to cede control over its domestic monetary policy to the Federal Reserve. Inflation is the result.)

 Now, her explanation that commodities price increases aren’t inflation bears explanation.  What she is saying is that dollar price increases in commodities aren’t necessarily inflationary to anyone except those using dollars for their currency.  Any country that pegs their currency to the dollar effectively uses dollars as their currency.   What’s the difference between, e.g., eight yuan and one dollar, if the Chinese government is willing and able to trade eight yuan for every dollar it receives?   There is none.  An eighth of a dollar buys a yuan–you say tomatoe, I say tomato. 

It’s a point worth internalizing as the political bloviators get cranked up (again) over China and its allegedly unfair trade practices.  We’ve no one to blame but ourselves if we don’t like the value of the yuan.  In that regard, China and America comprise something like an enormous Euro zone, with the same problems of coordinating monetary policies when there is no fiscal and political union.  Which country in our alliance do you suppose most resembles Germany?  And which resembles Spain?

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