America and Europe are pushing China to appreciate the yuan, because China’s “artificially weak currency undermines jobs and economic competitiveness in advanced Western economies. 1 Especially America has an interest in China fulfilling this goal. It’s economy lies in an anemic state. Private businesses are barely hiring, the government is in deep debt and is stymied by Tea Party and Republican sentiments of small government. As the economist Paul Krugman argues, we need the contrary. America urgently needs more investments and not less. 2
Even though China has appreciated the yuan somewhat, it rejects the notion that the yuan is greatly undervalued. China has an interest in keeping the yuan lower than the euro or the dollar, because its export economy is based on a lower value. The question after all is whether it matters all that much. The political commentator Fareed Zakaria argues it does not. What weakens America’s competitiveness comes not from abroad, but from within. ” ”[W]hat is apparent is that China is beginning a move up the value chain into industries and jobs that were until recently considered the prerogative of the Western world. This is the real China challenge. It is not being produced by Beijing’s currency manipulation or hidden subsidies but by strategic investment and hard work. The best and most effective response to it is not threats and tariffs but deep, structural reforms and major new investments to make the U.S. economy dynamic and its workers competitive.” 3
The problem is that America is conjuring up currency issues to distract from internal problems. Dominique Strauss-Kahn, head of the International Monetary Fund, is already warning the major industrial nations of the dangers of a currency war. 4 No one can and will profit from a currency war, but America will try to go as far as it can, and China won’t relent, since it’s economic standing expands relative to their political standing.
In the mean time, America has turned from the engine of innovation and prosperity to a nation of whiners and pessimists. In a move of uncreative ideas, the Federal Reserve is trying to counter a poor economy suffering from little investment, spending and job creation by increasing the money supply. They printed $600 billion and bought Treasury bonds. They are essentially doing the same thing that they criticize the Chinese for: manipulating their currency. What is their hope? The Fed intends to lower interest rates and increase inflation. If the interest rates are lower, people and businesses are willing to spend and invest more, which will create jobs and generate prosperity. If the dollar is worth less, it will be cheaper for foreigners to buy U.S products thereby helping the export industries. 5
I think that this logic is deeply flawed. It should be obvious why this is so. We already did this, and it created more problems than it solved. Whenever America is unwilling or unable to use non-monetary means to dig out of the recession, it uses the fiat power of the Federal Reserve to achieve economic goals. The fact that America eases access to capital will bolster irresponsible financial practices that lie at the heart of the great recession, we are slowly coming out from. In 2000, the dot-com bubble burst, because investors threw too much money into the internet market, blindly following the heed of the dot-com promise. Once too many venture capitalists went bankrupt, because their products were not well-proven, investors began to sell their shares, and the bubble burst. 6 One of the contributing factors to the dot-com bubble was the easy access to money. MSN money columnist William Fleckenstein even went so far as to blame Alan Greenspan, the longtime former chairman of the Federal Reserve and in charge of U.S monetary policy, for having caused the dot-com bubble. 7
The Fed reacted to the ensuing wave of unemployment and business restraint by printing more money. The Bush administration cut taxes for all Americans, especially the very wealthy, arguing that Clinton left him a huge surplus that belonged to the people, and using the surplus as a stimulus for the economy. The current account deficit soared, as America was transformed from the world’s largest producer to the world’s largest consumer. Above all, the monetary policy was again made expansionary in the hopes of stimulating growth. The investors used the abundant cash to invest in the real estate market. The financial institutions abandoned their primary focus on the traditional lending business, and took advantage of the repealed Glass-Steagall Act, that provided the separation of depository banks and Wall Street financial institutions (the latter being heavily involved in risky investment schemes), by giving out mortgages to as many people as possible, even though it appeared clear that some of them were not able to repay their mortgages. Homeowners (who actually don’t fully own a house if they haven’t paid off the whole mortgage) saw the values of their homes increase, because the demand was high. So they were led to refinance their homes, and use their homes as a credit card.
The real estate bubble burst, the house values plummet, people’s homes are foreclosed (I believe they should be allowed to stay in their homes), bringing the banks in deep despair. Banks have overleveraged, jeopardizing the deposits and the whole economy of the United States. But then the federal government stepped in and saved those financial institutions through bailouts. The blind faith in unregulated free market economy wrecked havoc. Tea partiers were rising up disgusted from the bailouts and the budget deficits. Obama and Bush both defended the bailouts, arguing it was necessary, since those financial institutions were too big to fail. Too big to fail? It was questionable whether those banks should have been allowed to grow this big in the first place.
What was the worst part in the bailout was not merely its necessity (I believe it was necessary, though unpopular), it was the unfounded implication that gains remain in the banks’ hands, whereas losses are socialized. The economist Joseph Stiglitz dubbed this unreasonable practice involving moral hazard “ersatz capitalism”. 8 Stiglitz continues in arguing that the same mistakes, the same pattern will occur if the policies are not altered drastically. He blasts corporate welfare that is making America more unproductive than ever before. The financial institutions with their emphasis on trading and inventing wealth at the expense of the real economy coupled with a lackluster government that fell prey to corporate-laden interests, and the distortions of a political stalemate (no bipartisanship in sight) massively exacerbated income inequalities that have existed for the past 30 years or so. It is easy to attack the homeowners, mostly lower middle class to working class families, who have seen their wages stagnate in the past decades due to modernization and globalization.
Were they irresponsible? Of course, they were, but only because the system was inducing them to be irresponsible. It was the financial institutions, the government and the Fed that pushed people into high mountains of debt. The businesses could remain complacent, because the added credit card gave them more sales. The people remained complacent too, since they could sustain their living standard without worrying about how to really pay for it. Former labor secretary Robert Reich even goes as far as seeing a reason for the recession in the rampant economic inequality and the concrete policies of the government. There was a time of continuous shared prosperity after the Great Depression, lasting until the 1970s. The New Deal brought forth the right to organize in unions, the minimum wage, high marginal tax rates, Social Security, the GI Bill and many other benefits that favored the rise of the middle class. The economy was running well, until modernization and globalization gave the wealthy the opportunity to shed jobs. Some were shipped overseas, others were not needed anymore. As the middle class was losing ground, these people could only find jobs in other lower paid sectors. The managers adapted to the new situation and supported Reagan as president, who effectively rolled back many of the New Deal reforms. 9 The rich got richer, because they could. And so with this unacceptable accumulation of public and private debts, we are reaping what we sow. For Reich, redistribution of wealth is a prerequisite to growth. 10
One of the reasons for this economic mess has been an overly expansionary monetary policy that is a weak excuse for not investing in key growth areas like energy, health care or education. Why should the Fed’s strategy become any better this time around? Why should government restrain itself to minimal functions of deficit reduction at the expense of renewing our infrastructure or creating jobs for the middle class? Why should we restrict ourselves to wail over China’s monetary policy, when they do everything to modernize and invest in their economy?
Stiglitz ended his book “Freefall” by asking,”Will we seize the opportunity to restore our sense of balance between the market and the state, between individualism and the community, between man and nature, between means and ends?” 11
1 Strupczewski, Jan, and Justyna Pawlak. “China Rebuffs EU Call for Rapid Yuan Appreciation.” Reuters. 04 Oct. 2010. Web. 06 Nov. 2010. .
2 Krugman, Paul. “Hey, Small Spender.” New York Times. 10 Oct. 2010. Web. 7 Nov. 2010. .
3 Zakaria, Fareed. “China Currency War: U.S. House Bill Won’t Fix Problem.” Time. 07 Oct. 2010. Web. 06 Nov. 2010. .
4 “IMF Chief’s Warning of Currency War ‘real Threat'” BBC News. 07 Oct. 2010. Web. 06 Nov. 2010. .
5 “The Fed’s $600 Billion QE2: Love Boat or Titanic?” Global Post. 05 Nov. 2010. Web. 06 Nov. 2010. .
6 Jamieson, By Darren. “Why Did the Dotcom Bubble Burst?” Just Search. 27 June 2007. Web. 06 Nov. 2010. .
7 Fleckenstein, William A., and Frederick Sheehan. Greenspan’s Bubbles: the Age of Ignorance at the Federal Reserve. New York: McGraw-Hill, 2008. Print.
Read a book review: “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve by Bill Fleckenstein.” Powell’s Books. Web. 06 Nov. 2010. .
8 Stiglitz, Joseph E. Freefall: America, Free Markets, and the Sinking of the World Economy. New York: W.W. Norton &, 2010. Print.
Read a book review: Kakutani, Michiko. “Skepticism for Obama’s Fiscal Policy.” New York Times. 18 Jan. 2010. Web. 7 Nov. 2010. .
9 Reich, Robert B. Aftershock: the next Economy and America’s Future. New York: Alfred A. Knopf, 2010. Print.
A picture illustration on Huffington Post: Reich, Robert. “‘Aftershock’: How America’s Shift Away From Helping Its Own Ruined The Economy And The Middle Class (PHOTOS).” The Huffington Post. 15 Sept. 2010. Web. 06 Nov. 2010. .
10 ibid.; Mallaby, Sebastian. “Fairer Deal.” New York Times. 24 Sept. 2010. Web. 7 Nov. 2010. .
11 Stiglitz, Joseph E. Freefall: America, Free Markets, and the Sinking of the World Economy. New York: W.W. Norton &, 2010. Print.
As quoted from the article: Elliot, Larry. “Freefall: Free Markets and the Sinking of the Global Economy by Joseph Stiglitz.” The Guardian. 30 Jan. 2010. Web. 06 Nov. 2010. .