The core of the “currency wars” — in which China has been accused, primarily by the United States, of undervaluing the renminbi to boost its exports — is a simple piece of arithmetic.
The US has only a quarter of China or India’s population.
The US can remain the world’s largest economy only if average Chinese or Indian living standards never exceed 25% of its own.
As — rightly — China and India will never accept this, a peaceful global outcome therefore requires that the US abandon its undesirable and impossible goal of a readjustment of the dollar-to-renminbi valuation.
The immediate political background is September’s vote by the US’s House of Representatives threatening China with tariffs unless it increases the exchange rate of its currency.
‘Make It in America’ agenda
Speaker Nancy Pelosi claimed the legislation was a “key part of our ‘Make It in America’ agenda”, arguing that forcing China to revalue the renminbi, thereby decreasing the price of its imports, “could create a million US manufacturing jobs”.
The dollar’s exchange rate then slid as the Federal Reserve accepted quantitative easing — that is, printing dollars — and central banks, including that of Japan, intervened to try to drive down their currencies against the dollar.
Pelosi does not seem to appreciate, however, that the US cannot profitably produce the goods it imports from China.
If tariffs were imposed, similar low-price products would be imported from India or Mexico. Indeed, a trade war would lead to a net loss of American jobs.
Any country hit by tariffs invariably reciprocates, and China would act against competitive US industries such as farm and high-tech products.
Scapegoat for domestic problems
American politicians are to some degree seeking a scapegoat for domestic problems — the equivalent of Nicolas Sarkozy’s anti-Roma campaign. But if the long-term goal of the US to remain the world’s largest economy is neither just nor achievable, it can engage with a perfectly legitimate concern — ensuring its population has the highest possible living standards.
The means to do this are not complicated. At the recession’s core is a US investment collapse. Since it began, household and government consumption has risen by $504-billion, whereas private fixed investment has fallen by $483-billion: the US economy remains in recession solely because of this investment decline. But there is no shortage of money for investment. Corporate saving over the same period almost doubled, from $247-billion to $472-billion.
US companies are now awash with finance. Because the private sector is failing to invest, the state should step in and undertake a large-scale investment, either through these corporations or using finance from them raised through bonds or taxation.
Many understand this simple logic. Richard Duncan’s The Corruption of Capitalism sets forth the aim that “the United States remains the world’s dominant superpower”.
He explains the choice clearly: “Trillion-dollar annual deficits … may keep the United States from collapsing into a severe depression … But they would do nothing to restore the economy’s long-term viability … The trade deficit would still be massive … structurally the economy would become increasingly rotten.”
Investment in technology
A much more attractive future, he argues, “requires a national industrial-restructuring programme in which the government invests in 21st-century technology with the goal of establishing an unassailable American lead”.
If the economics of this proposition are so simple, why doesn’t it happen? As George Soros explains, it is because of American anti-statist ideology: “The obvious solution is to distinguish between investment and consumption and increase the former while reducing the latter. But it seems politically untenable. A quarter-century of calling government bad has resulted in bad government.”
The fact that some US politicians’ economic arguments are confused is because they have created a situation in which the US has ample finance but no mechanism to turn it into investment. Consequently, it remains in economic stagnation.
Instead of creating a scapegoat in China and proclaiming “currency wars”, the way out is to address the US’s real economic problems. —