Today's Buggy Topic Was . . .
. . . inspired by a Paul Krugman op-ed in the NY Times, linked to at Economist's View, in which Krugman argued in favor of the US government officially condemning China as a currency-manipulator and imposing tariff retaliation against it. His reasons? China's ongoing large trade surpluses with the US during the current recession and for that matter with the outside world --- its multilateral current account surplus, trade in goods and services.
In the lengthy thread that followed at Economist's View, there were the usual empty-assertions left by the usual suspects, some in favor of Krugman's tactic and others opposed. No matter. Neither side offered much in the way of concrete evidence.
Enter Prof Bug's Two Long Posts
The first dealt at length with the almost equally large German trade surplus in goods and services on a multilateral basis, and to an extent with the large and similar Japanese multilateral trade-surplus as well. Yet, despite these big trade surpluses with the rest of the world, neither the Euro or the Yen can be accused of currency manipulation ---- keeping their currencies artificially low against the $US. On the contrary, both currencies have risen steadily against the dollar throughout the last decade. As prof bug also showed in that post, the French government openly criticized the ongoing trade surplus of the Germans, arguing that it is holding back the Eurozone recovery from the recession by draining fiscal stimulus packages' impact on job-creation out of the 15 members of the eurozone besides Germany and into that country's still anemic growth-recovery.
Enter the more central issue in the second prof bug post.
In it, prof bug notes that the Chinese renmimbi (the name of the Yuan for trade purposes with the outside world) climbed 20% against the $US between July 2005 and July 2008, a period when the Chinese government did let its currency float gradually upward with no or limited effort to intervene to stop it, and yet the Chinese trade surplus --- multilateral and bilateral with the USA --- rose to unprecedented rates.
So What's Going On?
As prof bug argued, a country whose economy is organized to run trade surpluses for decades does so because --- for reasons of both specific governmental policies and cultural norms held by the populations ---- national consumption is kept low compared to those countries like the English-speaking countries and most of the big countries in Europe. In the upshot, national production exceeds national consumption (absorption), and the excess is bound to be exported and produce a trade surplus. In technical terms, domestic savings exceed domestic investment, and the excess savings are exported abroad in the capital account of the balance of payments, which automatically entails an export-surplus in the current or trade account in goods and services.
And no matter what the currencies of such countries happen to be in dollars or other foreign currencies, a trade surplus will still materialize unless the private and public sectors start to save less and consume more.
Ultimately, it's true, an increasingly appreciating currency like the Yen or the Euro --- over which, as you know, the German government has no influence, with the European Bank for the eurozone letting the Euro float freely --- will gradually entice more and more households and businesses to buy cheaper foreign goods . . . though so far, a very large appreciation of the Japanese Yen for two decades now, has not had that impact. China's government, by contrast, is a Communist dictatorship, and its government can maneuver to limit national consumption by fiat.
Click Here for the Buggy Posts
And note how the growing annoyance with China's trade surplus in Washington D.C. ---- including the Obama White House --- reflects a growing discontent of a wider sort with Chinese foreign policies and diplomacy. Oh, don't forget. To find prof bug's two posts, scroll down to the end of the first page of posts at Economist's View, click on the "show more comments" bar, and find the posts on that second page.