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It's Time To Get Tough With China

Paul Krugman has a terrific column out today about China, and why it's absolutely crucial that the US join Japan in calling out the Chinese for keeping their currency weak in order to continue feeding their trade surplus. Some background: If

Paul Krugman has a terrific column out today about China, and why it's absolutely crucial that the US join Japan in calling out the Chinese for keeping their currency weak in order to continue feeding their trade surplus.

Some background: If discussion of Chinese currency policy seems confusing, it’s only because many people don’t want to face up to the stark, simple reality — namely, that China is deliberately keeping its currency artificially weak.

The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different.

This is especially bad right now, because our economy desperately needs the manufacturing sector to revive in order to grow again. Because China has a strange hybrid capitalist/communist economy, their currency manipulation rewards Chinese companies while keeping workers' wages low.

Underneath all of this, there is the fear that putting too much pressure on the Chinese to reform their currency policy would cause them to sell off US Treasury bonds. Krugman has an answer to that, and so do I:

Clearly, nothing will happen until or unless the United States shows that it’s willing to do what it normally does when another country subsidizes its exports: impose a temporary tariff that offsets the subsidy. So why has such action never been on the table?

One answer, as I’ve already suggested, is fear of what would happen if the Chinese stopped buying American bonds. But this fear is completely misplaced: in a world awash with excess savings, we don’t need China’s money — especially because the Federal Reserve could and should buy up any bonds the Chinese sell.

For years now, I've been asking why the US Government doesn't institute a program for Americans to invest in US bonds again. You'd think "true patriots" would rush to invest in their country, just like they did in World War II and other times in history. Yet, the usual answer to this question is that the rates of return are not in line with other investments, to which I reply with this: There's something to be said for putting your money in a safe investment with guaranteed income.

With inflation rates near zero, it seems to me to be a time where we start investing our own money in our own economy and take it out of the hands of the Chinese.

It’s true that the dollar would fall if China decided to dump some American holdings. But this would actually help the U.S. economy, making our exports more competitive. Ask the Japanese, who want China to stop buying their bonds because those purchases are driving up the yen.

Krugman also points out that certain powerful US business interests benefit from joint ventures in China, which he blames for US passivity. While some of that may be true, it's unclear to me whether that caution stems from a desire to benefit business or to keep the stock market from rocking again.

What we need here is a plain-English explanation of alternatives. If I were presented with an opportunity to invest my 401k in bonds to fund the green energy industry, or health IT initiatives, I'd do it in a heartbeat. What I'm not interested in doing is investing in the war initiatives or defense costs. It seems to me that this could all be done with some clarity in thinking and straightforward explanations, mixed with some cheerleading for buying and investing in our own country.

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