Trade Wars, Currency Conflicts and the Global Economy
http://thedianerehmshow.org/shows/2010-11-10/trade-wars-currency-conflicts-and-global-economy
World financial leaders gather in Seoul, South Korea tomorrow for a meeting of the G-20. Among issues of contention will be the Federal Reserve’s plan to add $600 billion to the U.S. economy. The strategy has been criticized by several countries including Germany, Brazil and to some extent China. Foreign ministers from these countries complain that while the Federal Reserve’s plan may be helpful in the U.S., it will likely drive down the value of the dollar and add new burdens to their own export driven economies: Trade imbalances, currency wars, and ongoing the struggle to right the global economy.
Guests
Zanny Minton Beddoes
economics editor, "The Economist;" formerly, economist at the International Monetary Fund
David Smick
chair and CEO, macroeconomic advisory firm Johnson Smick International, editor of The International Economy magazine, and author of the book, The World Is Curved
John Maggs
reporter, Politico
Comments
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Our economic relationship with China is an interesting one. In effect, instead of taxing our citizens adequately, we sell billions of dollars of treasury securities to China each year. That covers part of our federal budget deficit, while we buy lots of cheap items from China. Because many of the dollars we send to China come back to us as payments for the treasury securities and therefore do not result in an increase in the value of the yuan relative to the dollar, China is able to keep its currency undervalued, and its products remain cheap despite the huge trade deficit.
Meanwhile, China keeps lots of workers employed at very low wages. People who are struggling to get by on low wages do not revolt, so the ruling Chinese communists are able to keep control of their country.
When the Fed pumps six hundred billion dollars into the economy by buying longer term federal debt, and when the Fed pays for them by recording a balance on the books of the Fed i.e. by effectively printing the money, what it is doing is raising the price of those debt securities and lowering long term interest rates. That devalues the dollar against other currencies including the yuan, and it makes American products cheaper. That counters the currency manipulation by China and others.
In short, it is a good move by the Fed. Whether it is a big enough move remains to be seen.
Of course, for the short term, we need more federal spending to stimulate the economy, but politically, that is not going to happen. And for the long term, we need higher taxes and some less federal spending to reduce the federal deficit. But in the meantime, as a practical matter, the only tool we have is monetary policy, and we should be glad to be seeing it used.
Steve,
The US doesn't have to issue debt. We also don't have to tax OR borrow in order to spend. The country has the constitutional right to print money. Still, your points are good ones. FDR broke with the gold standard and devalued to great effect when elected. Whether that works this time round remains to be seen.
Diane, How do you find all these panelists that to a person refuse to talk about corporate responsibility, responsibility to do their share and to put patriotism ahead of profits? How many years can this show and the media in general avoid talking about corporate responsibility to stop firing and start hiring. How many job shows will only talk about what the government is doing and what people are doing without what corporations are doing. Diane, this is why people don't trust the media much anymore. Talk about jobs on a daily basis? Then talk about corporations firing and not hiring to boost profits, AND the backlash from customers and out of job workers.
Can someone fact check these comments? Why would we expect interest rates to increase when the Fed lowers prime interest rates? I am also extremely weary of the attitude of economic experts and commentators that there is nothing we can do to help the economy. They may be content to preside over a lost decade but I am not.
Maybe this was discussed before I was able to tune in to the show, but why do we feel that QE2 is okay for us to do no matter what its impacts are to other global economies but we're concerned about the Chinese "currency manipulation" when they are just trying to keep their imports competitive and we trying to devalue our own currency to make our imports more competitive?
Furthermore, what makes us think that an appreciating yuan will help us? I imagine that the our trade deficit will only shift from China to other SE Asian nations such as Thailand, India and South Korea instead of China. We won't actually make a dent in our trade deficit.
The global economy has failed because it is driven by the petrolgarchs and buying near slave labor as cheaply as possible. The nation and the world need to replace oil with a renewable fuel source, Free Market Hemp, we can do it and create millions of jobs in the process. Once again the economic pundits and soothsayers can prattle about the problem and not one word about how to grow our way out. We need to create a dollar based on the value of hemp because we all know what the value of a ton of hemp is, 200 gallons of fuel ....
Michael Hudson and Joseph Stiglitz have both had excellent commentaries on Quantitative Easement II at Democracy Now.
Stiglitz says it will not work to buoy domestic asset prices, and that even if it did these assets are in so few wealthy hands that little increase in alacrity would result. Hudson suspects a currency war is likely with much carry trade speculation, which could burst another bubble. Already banking reserves are being multiplied out to finance a dangerous gambling on commodities and resources by our financial class. Our own water and natural gas are being squandered in the rush. Listening to wiser experts than Diane's I can't help but think makework jobs in healthcare, education, infrastructure and green energy (at a living wage) are the only way to readjust the American economy. Ben Bernanke is only increasing the price of those trade gap electronics and leady toys most of us are obligated to supply at Christmas. Obama has already failed in his arms and nuclear reactor sales to BRICs and emerging economies. Big corporations will never hire at home again. Another free trade deal will only put the second fifth of us in the poorhouse. I pity the Family Dollar manager whose hours have gone from 56 to 70 recently, at the same salary... that's the story here!
It seems to me that little recognition is given by these macro-economists to outsourcing.
When Ms. Beddoes said that imports/exports were only a small part of the economy my jaw dropped. I work in a technical area that has lost 100 out of a former 150 jobs to our 'friend' India. Those left are miserable because management's attitude is 'we can always send your job overseas and save money.
I recommend Andy Groves article in an October edition of Business Week.
Really interesting point about subsidizing our taxes with cheap imported goods from China which allows China to buy our treasuries to cover our spending in excess of tax receipts!
I am an American investor in China and have lived here full time or part time for 16 years. Our business here produces products and sells them in the domestic China market with no export to the US.
In all of my time here in China, i have been operating here as a "free market capitalist". The government does not interfere in my pricing decisions, sourcing of materials, which markets I can operate in, etc. I'm just always curious when obviously well informed people use the word "communists" to describe China's government/system. Most of the economy is now privatized and it is capitalism which is raising hundreds of millions of people out of poverty and into reltaively comfortable, if more stressful, middle class lives.
It's true that the ruling party calls itself the Chinese Communist Party, and that from 1949 to 1978 it basically attempted a communist system, but it has been 30 years since they thought that system would work here. Ever since Deng Xiao Ping's famous ca 1980 comments "to get rich is glorious" and "it doesn't matter if a cat is black or white as long as it catches mice" the country has been on a capitalist track.
I'm certain based on the quality of Steve's comments that he was just using the term "communist" because that is the name of the political party running the government and not because he thinks there is still a communist system here!
Enjoy everyone's comments! After speaking Chinese all day, I come home and listen to the Diane Rehme show and it's always a great pleasure!
Allan
Thank you Allan for your honesty and success. It is too bad many people do not realize that capitalism made this country great. They just see the negative along with an Administration that does not have or has not seen the benefits of free enterprise.