The US House of Representatives has passed a "China currency" bill that would authorize the US officials to take economic actions against China, if China was found to manipulate its currency. And we all know that China is indeed keeping its currency artificially low by intervening in foreign-exchange markets and through various capital controls. So, I had a conversation regarding this with the person standing straight against me in the mirror - his name is "Mirror Image".
Me: So, now is the US supposed to take action against China?
Mirror Image: Well, technically looks like that's what US should do as per the rules.
Me: But wait a minute, should the US take actions now? Is this what our priority is now?
Mirror Image: Hey, our priority is to create jobs! And so we need to take action.
Me: But what's trade sanctions against China going to do with creating jobs?
Mirror Image: It will bring the US jobs back.
Me: You mean the capital intensive manufacturing jobs?
Mirror Image: Yes, the capital intensive manufacturing jobs.
Me: Wait a minute, I am confused. So, in other words, if China allows its currency to appreciate then the US will have its manufacturing jobs back?
Mirror Image: Hmmm...I think yes.
Me: Can you explain?
Mirror Image: Well, see, if China allows its currency to appreciate, then the Chinese consumers will have more purchasing power and they can buy more from us. Also, if Chinese currency appreciates, then US consumers will buy less from China while Chinese will buy more from US, thereby reducing US' trade deficit.
Me: Alright, what you said is true but I am still not clear - how will that create jobs in US?
Mirror Image: Well, if Chinese buy more from US, then US will be the producer, creating jobs, and China will be the consumer.
Me: Which Chinese consumer are you talking about - rich, middle-class or poor?
Mirror Image: All
Me: See, consumption by the rich really would not differ much due to the depreciation in the dollar because they are rich and they can afford even at current prices. Now, if you are talking about the middle-class and poor Chinese, you are very misguided. I have told you many times that around 35% - 40% of the Chinese GDP is contributed by exports and any loss in the export sector would lead to innumerable job losses in the middle-class and poor societies of China - then they cannot afford to buy "American" products.
Oh by the way, did you read the news yesterday - Here are some highlights from bloomberg.com -
"The dollar declined 2.2 percent to $1.3790 per euro, the weakest level since March 17" ;
"The U.S. currency weakened to 83.27 yen, from 84.21 yen the previous week";
"The Dollar Index declined 5.4 percent in September, the biggest monthly decline since May 2009 when it fell 6.2 percent";
"South Korea’s won led gains with a 2.2 percent weekly jump to 1,130.45 per dollar";
"The Australian and New Zealand dollars each rose 1.4 this week against the greenback as investors looked for higher interest rates"
"The Bloomberg Correlation-Weighted Currencies Indices show the dollar has declined 2.4 percent this year against a basket of currencies from 10 developed-world nations"
"The Swiss franc gained 1 percent against the greenback finishing the week at 0.0938 per dollar."
What all the above says is that the dollar has weakened against most of the major currencies throughout this year, which tells that the American exporters should have a better export atmosphere. But despite dollar's weakness against all these currencies, is it still the Chinese yuan's weakness against the dollar that is holding up jobs getting created in US?
Mirror Image: You are making me think now.....Hey, but since the Chinese yuan will have better purchasing power if they appreciate their currency, the Chinese govt. can diversify their investments and make the country less export-dependent.
Me: All this you want to happen in a few months from now? Are you dreaming? Did you forget that these are not service jobs to bring it back immediately, these are capital intensive manufacturing jobs and it takes years to build factories and other infra-structure in US, but which China already has and that could be used by other countries to make products cheap in China.
Mirror Image: But then we have to create jobs.
Me: Exactly! That's what I am saying too. We have to concentrate on creating jobs in US rather than complaining about China's currency policy. While undoubtedly, China has to start allowing its currency to float more freely, for which China has to first diversify its economy through investments in "other" areas, we have no time now to fight China over its currency policies - this is just a political distraction.
Mirror Image: But people argue that US is not even facing inflation rather we are facing disinflation and fearing deflation. So, again, its ok if prices go up in US due to China appreciating its currency. IS this because of this "inflation" worry that you don't want to fight China over its currency policy.
Me: No, go and think again what I said. And since you have brought this inflation/deflation topic, I would like to tell you about the other article that I read in businessweek.com. Here is the head line - "Companies Reluctant to Hike Prices Despite Rising Costs" and it further further goes to say - "Commodity prices and other corporate costs are headed higher, but many consumers refuse to pay more for products. The result could be weaker profits and slower hiring".
So, does that make it clear for you that its not deflation of inflation now - its deflation or stagflation - oh yea, we haven't come to the stagflation stage yet and I do not want to, but if jobs are not created through proper investments in right infrastructure, technology and people and if right incentives are not given to the right people then years down the road stagflation might be a topic of discussion.
Mirror Image: We are facing disinflation now!!!!
Me: Yes, agree, but see the data, we won't face deflation either. Its all because, some countries (both developed and developing) countries are growing at enormous and good rates while some are not growing or are growing too slowly. It's a complicated global macro-economic situation which we will talk later.
Mirror Image: Ok, ok. But again, we need jobs and by the way, we need manufacturing jobs!
Me: Good. I agree. But I don't agree that we have to be concentrating on bringing our jobs back from China, infact they are no more "our" jobs, but instead we should concentrate on creating new jobs and preserving those jobs for future generations of people of the US.
Mirror Image: So what you say should we do for that?
Me: The people of US have a great innovative mind. I don't think they need suggestions, they just need support - "quality" support from policy-makers.
Mirror Image: Is that all?
Me: Seems simple right? But hey, I said that the support is needed from policy-makers. So its not that easy.
Mirror Image: Oh yea, I hear you friend!
Me: All right, got to go, nice talking to you buddy.
Mirror Image: Same here man - see you soon when you comb your hair! :)
Sources:
1. http://www.bbc.co.uk/news/business-11437808
2. http://www.bloomberg.com/news/2010-10-02/dollar-falls-to-6-month-low-versus-euro-as-fed-view-dims-u-s-asset-allure.html
3. http://www.businessweek.com/investor/content/sep2010/pi20100924_590869.htm
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