About-Face on Renminbi Threatens Economic Melt-Down

It seems like like all the economics bloggers are talking about floating the Chinese Yuan, “soft landings” and “hard landings” and what the Federal Reserve is going to do about what. The bothersome thing about brilliant minds is that they churn through so many permutations so quickly, it can be hard to follow without rigorous training and frequent practice. They’re out of my league, but Nouriel Roubini’s rage sums it up nicely: Is the US Really Serious or Masochist About Demanding a Revaluation of the Chinese Currency? Playing with Fire and the Risk of a Market Crash

The Prompt:

The Bush administration’s sudden shift on China’s currency regime last week came as a surprise to many. After several years of claiming its “financial diplomacy” was paying dividends, the US Treasury suddenly called for China to move immediately to a flexible currency. Two senior administration officials said the call to change tactics on China was a political decision made at the White House. The Treasury’s policy – widely supported by China experts who say Beijing is less likely to move in the face of public hectoring – was overturned because of White House concern at rising protectionist pressure in Congress. (source: Financial Times 22 APR 2005)

Roubini’s Response:

As a Chinese revaluation (obviously followed by the revaluation of other Asian currencies) would lead to a significant deceleration of the rate of accumulation of new dollar reserves in China and Asia, it is clear that such reduced supply of financing of the US twin deficits from China/Asia would lead… to a sharp increase in the US long term interest rate… How much would US long term rates increase if China and Asia were to stop intervening or even only reduce the rate at which they accumulate dollar reserves? In previous work we argued at least 200 basis points.

Thus, the crucial question is: are the US authorities really “serious” about demanding that China gets serious with its currency de-pegging or are really clueless and masochistic?

There are at least three interpretations of the US posturing:

  1. Talk is cheap and the posturing is aimed at containing protectionist pressures in the US.
  2. The US authorities are really clueless or masochistic.
  3. Wishful thinking that a Chinese revaluation alone would solve the US current account problems.

I have to give the guys in the Administration a little credit – they probably do know what they’re doing. They are too smart to be that stupid. So the fouth possible explanation, no matter how unsavory, is that the sadistic bastards intend to crash the US economy.

Choose the conspiratorial reason of your choice.

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