Tag Archives: Dollar

En appresiering av Kina. Free Exchange skriver om yuan/dollar:

Diskusjonen rundt en svak yuan, billigere å kjøpe kinesiske varer for alle oss andre og dermed ikke fra USA, er i ferd med å hetes opp igjen. Her er ett godt poeng, nemlig at en sterkere yuan ikke har den effekten på amerikansk sysselsetting som tror:

China, an appreciation:

WITH a China currency bill making its way through Congress, the debate over whether America ought to get tough with China is firing up yet again. The case for an aggressive American approach continues to look very weak to me. Some writers are taking on the idea that Chinese inflation is having much of an effect on its export competitiveness—that is, contributing to a real adjustment much larger than what’s observed in the nominal exchange rate. Kash Mansori makes an argument to that effect in this post, which has gotten a lot of attention. He compares CPI data in America and China and figures that Chinese prices have risen just 6.7% more than American prices since 2005—less of a contribution to adjustment, in other words, than one might have assumed.

That estimate seems unrealistically low to me. Looking at IMF figures on consumer prices and GDP deflators, the differential in inflation between 2005 and 2011 has been about 7 percentage points according to the former and 20 percentage points by the latter. The Economist put together an analysis of the real yuan-dollar rate and found that real appreciation has been significantly greater than nominal appreciation. From 2009 to early 2011, the analysis found, the yuan appreciated by just 4% in nominal terms, but by 17% in real terms, after accounting for inflation. The differential in wage growth has been more dramatic still. A Bureau of Labour Statistics report from earlier this year found that between 2002 and 2008, American manufacturing wages rose by just 20% while Chinese manufacturing wages doubled. 

Meanwhile, other writers seem not to appreciate the trade-off that’s actually on the table. Noah Smith seems to imply that critics of a «get tough» approach mainly think there would be no benefit to a yuan appreciation. I readily agree that there would be some benefit to both China and America of an appreciation in the yuan. It’s difficult to demonstrate that there would be substantial benefit, however. Mr Smith cites economist Menzie Chinn in support of the point that a yuan appreciation would benefit both parties. Fair enough, but Mr Chinn has also written that a dearer yuan might not lead to a big increase in Chinese imports and might not have much of an effect in the absence of a broader Asian appreciation. He also cites Eswar Prasad’s argument that a yuan appreciation would likely have little impact on American employment. There is a benefit there, but it’s not at all sure to be a large one.

Meanwhile, the yuan is appreciating, by a meaningful amount in nominal terms and by even more in real terms. And there is some set of potentially serious risks to getting tough with China, including the possibility of a major trade dispute between the world’s two largest economies at a time of significant global uncertainty and broadly declining industrial output.

So the question is what the expected value of a get-tough approach is likely to be. How much faster an appreciation is American pressure likely to induce? It’s hard to see how China would tolerate much more appreciation. So we have a small increase in the rate of change of a policy with relatively small benefits, and against that we have the risk of a major trade dispute between the world's two biggest economies at the worst possible time.

The issue is not that there’s no gain from appreciation. It’s that an aggressive American approach seems unlikely to generate appreciation over and above the current rate at an acceptable cost. The onus is on supporters of a get-tough approach to show that the trade-off is worth the trouble, and so far they’ve done nothing of the sort.

(Via Free exchange.)

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Barry Eichengreen om dollaren og dens fall?

The Dollar's Reign as Reserve Currency: «The Dollar: Dominant no more?: If the euro’s crisis has a silver lining, it is that it has diverted attention away from risks to the dollar. It was not that long ago that confident observers were all predicting that the dollar was about to lose its ‘exorbitant privilege’ as the leading international currency. First there was financial crisis, born and bred in the US. Then there was the second wave for quantitative easing, which seemed designed to drive down the dollar on foreign exchange markets. All this made the dollar’s loss of pre-eminence seem inevitable. The tables have turned. Now it is Europe that has deep economic and financial problems. Now it is the European Central Bank that seems certain to have to ramp up its bond-buying program. Now it is the Eurozone where political gridlock prevents policymakers from resolving the problem.

In the US meanwhile, we have the extension of the Bush tax cuts together with payroll tax reductions, which amount to a further extension of the expiring fiscal stimulus. This tax ‘compromise’, as it is known, has led economists to up their forecasts of US growth in 2011 from 3% to 4%. In Europe, meanwhile, where fiscal austerity is all the rage, these kind of upward revisions are exceedingly unlikely…. Ten years from now the renminbi is likely to be a major player in the international domain. But for now capital controls limit its attractiveness as an investment vehicle and an international currency. Yet this has not prevented the Malaysian central bank from adding Chinese bonds to its foreign reserves. Nor has it prevented companies like McDonald’s and Caterpillar from issuing renminbi-denominated bonds to finance their Chinese operations. But China will have to move significantly further in opening its financial markets, enhancing their liquidity, and strengthening rule of law before its currency comes into widespread international use. So the dollar is here to stay, more likely than not, if only for want of an alternative.

With exorbitant privilege comes exorbitant responsibility

The one thing that could jeopardise the dollar’s dominance would be significant economic mismanagement in the US. And significant economic mismanagement is not something that can be ruled out. The Congress and Administration have shown no willingness to take the hard decisions needed to close the budget gap. The Republicans have made themselves the party of no new taxes and mythical spending cuts. The Democrats are unable to articulate an alternative. 2011 will see another $1 trillion deficit. It is hard to imagine that 2012, an election year, will be any different. And the situation only deteriorates after that as the baby boomers retire and health care and pension costs explode. We know just how these kind of fiscal crises play out…. Previously sanguine investors wake up one morning to the fact that holding dollars is risky. They fear that the US government, unable to square the budgetary circle, will impose a withholding tax on treasury bond interest – on treasury bond interest to foreigners in particular. Bond spreads will shoot up. The dollar will tank with the rush out of the greenback.

The impact on the international system would not be pretty….

With exorbitant privilege comes exorbitant responsibility. Responsibility for preventing the international monetary and financial system from descending into chaos rests with the US. How much time does it have? Currency crises generally occur right before or after elections. Can you say November 2012?»

(Via Brad DeLong.)

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