Thursday, March 18, 2010

Be careful what you wish for

File these stories under “be careful what you wish for”:

Now even the World Bank has called for China to re-value the RMB. Moreover, there have been calls within the US to get tough with China on a number of fronts, e.g. label her a “currency manipulator”. Mish has an insightful post that discusses the effects of a possible Chinese re-valuation:

Let's consider the global shock effect of a sudden large revaluation of the Renmimbi. The key is the RMB does not float. To get a 40% rise in valuation, China must buy or sell unlimited amounts of RMB against the dollar to maintain the desired price. That might mean a huge hike in Chinese interest rates to make holding the RMB attractive.
In turn, sharp interest rate hikes would likely cause a huge slowdown in China, decreasing China's demand for imports. This is yet another factor that Krugman and those crying "currency manipulator" miss.

And should the US impose a revaluation via tariffs, I would like to point out a little thing called Smoot-Hawley.
Over on the other side of the pond, Macro Man also mused on the comparisons between Germany and China:

Each, in their own way, has locked in an uber-competitive exchange rate with its major trading partners: Germany via EMU and China via serial piss-taking in currency markets. Each in their own way is acting hypocritically: neither wants their major customers to borrow profligately, but neither do they wish for them to quit buying.
His conclusion was the same as Martin Wolf in the FT: “the most feasible country to leave EMU is Germany itself.” So what would happen if the US were to leave the Chimerica marriage of convenience? Here is Macro Man [emphasis mine]:

However, unlike Greece, the US is not part of a formal de jure currency union, merely a de facto one. The implication is that with sufficient political will, the United States can extricate itself from the current arrangement. To be sure, there may be demerits associated with such a move: higher borrowing costs as China stops buying/sells Treasuries.

I return to the theme discussed in my previous post entitled Time bombs everywhere. Are America's political leaders willing to grit their collective teeth and choose the heart attack option by plunging the country and the world into a double-dip recession (or depression) now in return for the long term gain of the correction of global imbalances in savings and consumption?

Be careful what you wish for, you might just get it.

3 comments:

dev2lyzbpz said...

Thank you for this. You make very clear what less clever people like me feel to be the case but could not bring into words so sharply: an excellent formulation of the financial / political dilemma's of the moment. Not just in this post!

See how the politicians in the US, EU and China try to find their way (and our futures) out of these dilemma's - not without being observated by several other parties (international and national politics, commerce) ...

Will it first of all be "inflation or deflation", and /or "changes in the value of the valuta", and / or "protectionism or good trade relations"?

Indeed: what shall WE be able to do if the imbalances lead to greater imbalances, and then? Prepare for some rough rides and wish ourselves and our co-citizens on this earth much luck?

Good that this communication is possible!

Boudewijn Koole, Driebergen, the Netherlands

Andy Dong said...

There may be risks of double-dip recession.

However, one thing to bear in mind is that so long as Ben Benanke is in charge of the Fed reserve.

The chance of double-dip recession is fairly slim at least in the short term.

Money printing is the specialty of Fed reserve since the abolish of gold standard.

I hate to say this. But it is the truth.

Who cares what will happen to the economy or the world for that matter in 10, 20 and 30 years?

Who cares whether the future generations will bear the burden of largeseness of the prior generations (baby boomer)?

The fact is that the future generation has already began the process via the massive wealth transfer to the baby boomers in the housing market in parts of the world right now. (Just look at Australia,China, Hong Kong and many other Asian countries).

We are in an unprecedented period of time. I couldn't bear the thought of what will happen when this credit frenzy all come to an end.

I say, seize the moment now, forget about the future because there doesn't appear to be any.

Yuri Jossa said...

The points you make in your commentary have been covered (and proven incorrect) by The Telegraph's Ambrose Evans-Pritchard:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7442926/Is-Chinas-Politburo-spoiling-for-a-showdown-with-America.html

1-The Smoot-Hawley Tariff Act did not cause the Depression

2-In the event of a China vs. US trade war, China has the losing cards, as the entire world is already flooded with the artificially devalued low-quality crap they build.
We already have in the US all the industrial know-how to replace everything China builds. Sure, prices will be higher, but that won't stop US consumers from purchasing US made goods, knowing it is providing employment to US workers

3-"Any attempt to retaliate by triggering a US bond crisis would rebound against China, and could be stopped - in extremis - by capital controls. Roosevelt changed the rules in 1933. Such things happen. The China-US relationship is no doubt symbiotic, but a clash would not be "mutual assured destruction", as often claimed. Washington would win."