Hyperbole you say? No, ultra-hyperbole. And this is where The Impudent Iconoclast will step in. While none of the staff here at II are particular experts on the subject, what we can do is help break down those assumptions and challenge the so-called facts.
The first response a well-read cynic should have to the argument ought to be to question the assumption that Chinese currency manipulation is necessarily bad; for the US, themselves, or the world. To begin with, China is not the only nation that manipulates its currency. Most of the world's money value is determined by its own governments. America abandoned the gold standard decades ago for the fiat standard which basically states that the dollar cannot be redeemed for anything tangible. It is therefore easy to take one's naïveté to extremes and develop outrageous scenarios. Read this excerpt from Wikipedia and just try to not let your imagination project history into today's situation:
"During the Great Depression, every major currency abandoned the gold standard. Among the earliest, the Bank of England abandoned the gold standard in 1931 as speculators demanded gold in exchange for currency, threatening the solvency of the British monetary system. This pattern repeated throughout Europe and North America. In the United States, the Federal Reserve was forced to raise interest rates in order to protect the gold standard for the US dollar, worsening already severe domestic economic pressures. After bank runs became more pronounced in early 1933, people began to hoard gold coins as distrust for banks led to distrust for paper money, worsening deflation and depleting gold reserves.
"The Gold Reserve Act
"In early 1933, in order to fight severe deflation Congress and President Roosevelt implemented a series of Acts of Congress and Executive Orders which suspended the gold standard except for foreign exchange, revoked gold as universal legal tender for debts, and banned private ownership of significant amounts of gold coin. These acts included Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, the Agricultural Adjustment Act, 1933 Banking Act, House Joint Resolution 192, and later the Gold Reserve Act. These actions were upheld by the US Supreme Court in the "Gold Clause Cases" in 1935.
"For foreign exchange purposes, the set $20.67 per ounce value of the dollar was lifted, allowing the dollar to float freely in foreign exchange markets with no set value in gold. This was terminated after one year. Roosevelt attempted first to restabilize falling prices with the Agricultural Adjustment Act, however, this did not prove popular, so instead the next politically popular option was to devalue the dollar on foreign exchange markets. Under the Gold Reserve Act the value of the dollar was fixed at $35 per ounce, making the dollar more attractive for foreign buyers (and making foreign currencies more expensive to those holding US dollars). The higher price increased the conversion of gold into dollars, allowing the U.S. to effectively corner the world gold market.
"The suspension of the gold standard was considered temporary by many in markets and in the government at the time, but restoring the standard was considered a low priority to dealing with other issues.
"Under the post-World War II Bretton Woods system, all other currencies were valued in terms of U.S. dollars and were thus indirectly linked to the gold standard. The need for the U.S. government to maintain both a $35 per troy ounce (112.53 ¢/g) market price of gold and also the conversion to foreign currencies caused economic and trade pressures. By the early 1960s, compensation for these pressures started to become too complicated to manage.
"In March 1968, the effort to control the private market price of gold was abandoned. A two-tier system began. In this system all central-bank transactions in gold were insulated from the free market price. Central banks would trade gold among themselves at $35 per troy ounce (112.53 ¢/g) but would not trade with the private market. The private market could trade at the equilibrium market price and there would be no official intervention. The price immediately jumped to $43 per troy ounce (138.25 ¢/g). The price of gold touched briefly back at $35 (112.53 ¢/g) near the end of 1969 before beginning a steady price increase. This gold price increase turned steep through 1972 and hit a high that year of over $70 (2.25 $/g). By that time floating exchange rates had also begun to emerge, which indicated the de facto dissolution of the Bretton Woods system. The two-tier system was abandoned in November 1973. By then the price of gold had reached $100 per troy ounce (3.22 $/g).
"In the early 1970s, inflation caused by rising prices for imported commodities, especially oil, and spending on the Vietnam War, which was not counteracted by cuts in other government expenditures, combined with a trade deficit to create a situation in which the dollar was worth less than the gold used to back it.
"In 1971, President Richard Nixon unilaterally ordered the cancellation of the direct convertibility of the United States dollar to gold. This act was known as the Nixon Shock."
[Skip down some...]
"Fiat standard
"Today, like the currency of most nations, the dollar is fiat money, unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note. Consequently, proponents of the intrinsic theory of value believe that the dollar has little intrinsic value (i.e., none except for the value of the paper) and is only valuable as a medium of exchange and for their ability to buy government debt.
"In 1963, the words "PAYABLE TO THE BEARER ON DEMAND" were removed from all newly issued Federal Reserve notes. Then, in 1968, redemption of pre-1963 Federal Reserve notes for gold or silver officially ended. The Coinage Act of 1965 removed all silver from quarters and dimes, which were 90% silver prior to the act. However, there was a provision in the act allowing some coins to contain a 40% silver consistency, such as the Kennedy Half Dollar. Later, even this provision was removed, and all coins minted for general circulation are now mostly clad. The content of the nickel has not changed since 1946.
"All circulating notes, issued from 1861 to present, will be honored by the government at face value as legal tender. This means only that the government will give the holder of the notes new federal reserve notes in exchange for the note (or will accept the old notes as payments for debts owed to the federal government). The government is not obligated to redeem the notes for gold or silver, even if the note itself states that it is so redeemable. Some bills may have a premium to collectors."
The situation demands an over-simplified analogy. Say; for instance, there is a kid named Butters who owns a business where he has girls that will sell boys kisses for money. Butters' employees sell kisses for $5 and in exchange for their productivity are compensated in sunshine stickers which can be redeemed to Butters for tangible assets like clothing and shelter. Now the rate of sticker redemption is set by Butters and has absolutely no value to the boys who use dollars. The analogy continues but the important idea is that the boys are not allowed to have sunshine stickers; so why should they care how many it takes in order to redeem a fur coat?
Up until just very recently the Yuan has been closed to foreign investors. So if outsiders are not allowed to buy Chinese currency, why does the exchange rate matter? Further, if the US as a net importer gives dollars to China for their exports then is there not an intrinsic value for the Yuan due to commodity exchange? Continue.
Now Butters has a glut of dollars. He has rigged the system so that his girls cannot sell their stickers or fur coats to the boys. And the boys could not afford them anyway because they have used all their money to buy the kisses. Now Butters has an obligation to keep his girls working so he lends the boys back their money so they can keep buying the kisses. The boys have now realized inflation. And because they have to borrow the money to buy the kiss, they have just now paid over $5 for something that is only worth $5.
This is where the argument breaks down into the typical talking points of debt loads, calling in the loans, weak dollars, inflation, deflation, stagflation, and so on. People develop scenarios in which China calls their debts and war breaks out or the value of gold will skyrocket as a result of global deflation or that a New World Order will emerge with a global currency to rule the world.
According to the analogy; however, Butters is happy because he is still in business and making money. The girls are happy because they are working and earning sunshine stickers, and the boys are still getting kissed. Now Butters has a glut of dollars, IOUs for more dollars, and sunshine stickers. The girls are no longer craving the stickers because they have a glut of tangible assets and hence productivity is suffering. They boys are complaining about the price of kisses but cannot live life without them.
So what does the exchange rate for the sunshine stickers have to do with all this and more importantly is the rate manipulation necessarily bad for the boys? So far, nothing and not yet.
Currently the boys are grumbling because they are starting to realize that at the rate they are going they will not be able to afford more kisses in the future. The girls are worried about Butters' ability to keep them fed and sheltered if their kisses dry up. And Butters is concerned that his stash of cash will become worthless and his girls will stop spending their sunshine stickers.
Unfortunately for the boys and girls it seems that the future will be dictated by Butters. As Matthew Goode's character Gary in 2007's "The Lookout" once said "Whoever has the money has the power." And if one is inclined to think that a loss of power is bad, or if the boys do not trust Butters to look out for their best interest; then it seems the debtors are in a bad situation. But not because of the manipulation of the foreign currency. It would seem as though focusing on that single issue would either be an incredibly insightful (but would only work in a handful of the possible scenarios, (like trade protectionism)) hedge to the future or a fallacy. Call it a fallacy of the single cause or post hoc, but our II money is on the fallacy. Even today as leaders of the two nations met in Washington D.C. to discuss this very issue the Chinese have directly addressed the issue. From the Wall Street Journal:
"The trade imbalance between the U.S. and China has many causes, and isn't due to the yuan exchange rate, Chinese Commerce Minister Chen Deming said Wednesday in the U.S., according to the state-run Xinhua News Agency.
"The trade surpluses of other Asian nations, including Japan and Korea, have been transferred to China because of the migration of some export manufacturing to the country, Chen was cited by Xinhua as saying. Asia's total trade surplus with the U.S. hasn't changed very much, he added.
"China is willing to work with the U.S. to improve the trade balance and to promote trade liberalization, Chen said.
"He repeated China's longstanding call that the U.S. lift restrictions on the export of some high-tech goods to China, saying the restrictions "discriminate" against China."
Obviously the debate is complex and emotional. Good and bad, winners and losers, and prophets and fools will not be determined for a long time. But being able to identify and confront the fallacies invoked during these arguments will be of mutual benefit and should help to temper the emotional toll it wreaks on the participants.
Sources:
