No refund for you even if you don't understand what I am saying!

We live in magical times.  When we want something, all we need to do is go to a store and hand them colorful paper and walk away with that product.  Or, we slide a plastic and that product is all ours.  Better yet, we look at a magical screen while sitting comfortably on our beds, choose what we want, type in something, and a few hours to few days later, that arrives on our front steps from god-knows-where, .  It is one crazy world, if you were to stop and think about it.

What a contrast to the world that I have experienced in my own life, back when I was a child, which seems like it was only yesterday.  I can still picture in my mind visiting with the grandmother.  Early in the morning the "thayir" (yogurt) woman comes knocking.  I offer to help out.  Grandmother doesn't give me money to pay for it, but gives me rice to hand over to the thayir-woman.

Of course, we now refer to that as a barter system.  But, I can't help thinking that the thayir-woman didn't see any reason to receive in exchange a piece of paper--currency.  She preferred something that was tangible, something that was going to be immediately useful.

We have come a long way since those thayir-woman days.

Currency is all over the news now.  Over in Europe, the Greece-Euro dra(ch)ma continues.  Keep going east, and there is all that news and commentary over China's devaluation of its currency.

Paul Krugman had linked to this analysis, which I thought might make my life better.  I read the following:

There is, however, a more fundamental reason for the devaluation. China has been violating the impossible trinity. This notion says a country can only do on a sustained basis two of three potentially desired objectives: maintain a fixed exchange rate, exercise discretionary monetary policy, and allow free capital flows. If a country tries all three objectives then economic imbalances will build and eventually give way to some kind of painful adjustment.

It made me think it might be time for me to get that lobotomy that I have been putting off!

I was reminded of a play that we read back in high school.  It was called "The Refund."  The setup in this farce is a chance encounter that two old high schoolmates have decades after graduation.  The protagonist, Wasserkopf, says:

Here I was walking along the street, fired from my last job, and wondering how I could get hold of some cash, because I was quite broke. I met Leaderer. I said, ‘How goes it, Leaderer?’ ‘Fine!’ he says. ‘I’ve got to hurry to the broker’s to collect the money I made speculating in foreign exchange.’ ‘What’s foreign exchange?’ I said. He says ‘I haven’t got the time to tell you now, but, according to the paper, Hungarian money is down seventy points, and I’ve made the difference. Don’t you understand?’ Well, I didn’t understand. I said, ‘How do you make money if money goes down?’ and he says, ‘Wasserkopf, if you don’t know that, you don’t know a damn thing. Go to the school and get your tuition fees back.’ Then he hurried away and left me standing there, and I said to myself, ‘Why shouldn’t I do that?’ He’s right, now that I’ve thought it over. 

Of course, the principal and teachers make sure he does not get a refund, by explaining that his bizarre answers are all correct.  Reading all that news and commentary, I too feel like I want a refund of all my school fees.  I can't seem to understand any damn thing anymore.  It is not only with the currency, for that matter.  The fact that nobody can explain why The Donald is setting the terms of political debate means that we all deserve a free prefrontal lobotomy! ;)

I suppose everyday life will only get more and complicated as we move into the future.  The days of the thayir-woman and the easy to understand barter, are over.  Maybe we rush around because we don't want to stop and think about all these.  If we paused, we might sign up for a lobotomy!  Oh well, I have some grocery shopping to do and maybe I will buy yogurt too. ;)

Currency wars reach the Indian shores

A few days ago, I quoted Martin Wolf, who wrote in the Financial Times that:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

And ...?  Here is the NY Times:

The Indian rupee is soaring — up 9 percent against the dollar in the last 16 months. That has taken a toll on exports like textiles by making them more expensive on the world market. And the strong rupee poses longer-term threats of overheating the economy.

So, one would expect India to take appropriate action?  Not yet ...

instead of fighting currency appreciation, as Brazil and some other countries have done, India has been willing to let the rupee rise — for now, at least.
India is simply too hungry for the foreign capital that is drawn to the strong rupee and is driving it higher, because that influx of money is helping support this country’s approach to developing a modern consumer economy.

Makes sense,right?  A developing country will need capital for all kinds of investments, and if foreigners are eager to send their money across, hey, grab that:

The influx of capital has helped fuel a nearly 9 percent annual growth rate for India’s economy. It has also powered the Indian stock market to near record highs. A big beneficiary of the stock rally has been the government, which is selling shares in state-owned firms like Coal India, the world’s largest coal miner.
The government, which has a large budget deficit, plans to raise $9 billion in the current fiscal year from share sales and spend the money on jobs for the rural poor and other welfare programs. A stronger rupee also reduces India’s bill for commodities, like oil, that it needs to import.

Imagine if China too allows its currency to appreciate ...

Free Falling: the US Dollar :(

Protectionism and currency battles

Somehow, I cannot imagine Christine "I am not a witch" O'Donnell casting a meaningful Senate vote on bills that address anything remotely related to the following discussions :)
(editor: why pick on O'Donnell?  You think Al Franken can? Awshutup!)

My increasingly favorite economist Raghuram Rajan is interviewed by Der Spiegel:

SPIEGEL: China and India are advancing to become the engines of the world economy, whereas the economies in the old industrialized world have become sluggish. What is the future role of economies like those of the US, France or Germany?
Rajan: The traditional industrial countries have to be prepared for the fact that they will lose their natural advantages. Let me give you an example: When you're working for a fashion company in Milan, you just have to look outside your window to be inspired. But the new customers live far away -- in Shanghai, for example. That's where the demand is and where the designs will soon have to be created. Things will not be as easy in Milan as they once were.
SPIEGEL: So you're saying that Western companies will not only be moving parts of their production abroad, but also services?
Rajan: The central question is this: How can industrial companies serve the demand that is developed thousands of miles away? This is the great challenge for the coming years. I suspect that in such an environment protectionist impulses will get stronger.

Over at Financial Times, Martin Wolf explains how the global economic wars are being fought:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

Hey, Professor Bernanke, rev up those dollar bill machines :) 

Wolf adds:

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from abroad into emerging economies of more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital, albeit at a falling rate (see chart).
Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

WTF is all I can think now!

It is the new economic geography, stupid. Or not?

Looks like Paul Krugman has started throwing punches in every street battle.  Krugman is now doing an Obama of trying to be everywhere.  Chill it, Prof!

First it was his rather shrill attack on Paul Ryan, by using metaphors to describe the person.  Whatever happened to the academic in Krugman to focus on the arguments and not on the person?   Maybe Krugman has been listening too much to the master manipulator of metaphors whose office is just down the hall from his? :)  Megan McArdle has articulated well what I have in mind:

there are legitimate concerns about whether the roadmap would actually reduce the deficit.  Of course there are legitimate concerns; I share them.  (For that matter, I have legitimate concerns about pretty much every policy proposal ever invented.)  But I am not the person who titled his column "The Flim-Flam Man" and turned the raising of legitimate concerns into the side-show of an all-out attack on Paul Ryan's credibility and ethics, while treating an estimate from the Tax Policy Center as a fact rather than one possible model. 

If you think that this is all rather beside the point, then bring it up with Krugman, who not only did multiple follow-up posts on Ryan's alleged dishonest campaign to prevent his tax program from getting scored, but also seems to have been so tickled by his column title that he threw in a bonus Diana Krall video**.

Nor, in my experience, do such attacks help get one's legitimate concerns addressed.  Rather the opposite, in fact; they tend to entrench the opposition, who for some reason often fear that they will not get a fair hearing.

And now, Krugman is ticked off at a FT opinion piece that opens with a direct hit at Krugman:

China’s exchange rate continues to be blamed for global economic imbalances, with the economist Paul Krugman one of Beijing’s staunchest critics. Even after China announced a change in its currency policy in June, Mr Krugman argued that it did not “address the real issue, which is that China has been promoting its exports at the rest of the world’s expense”. Yet, arguably, it is the Nobel Prize-winning ideas that Mr Krugman developed three decades ago, not currency manipulation, that have led to China’s unparalleled growth.

At least this time Krugman is not resorting to name calling--no "flimflam man" :) and points out that:

surpluses, and the currency manipulation, are neither intimately related to Chinese growth nor necessary for that growth to continue.

The dollar, Renminbi, Geithner, and India

Yes, those four belong in the same context because the US Treasury Secretary is in India, even as the world is getting more and more interested in the tensions over the US' concerns that China is holding its currency down at an artificially lower exchange rate.

First, these tidbits about Geithner and Obama:

During the early 1980s, Geithner's father Peter Geithner oversaw Ford Foundation's microfinance programs in Indonesia developed by Ann Dunham Soetoro, President Barack Obama's mother. Prior to that, Geithner Sr headed the Ford Foundation operations in India, which led to a toddler Tim spending his early years in New Delhi, where he had a crack at cricket but remained true to baseball.

So, tidbits aside, what is the Secretary thinking about these days with the China report due in less than a fortnight?

Geithner suggests, it is the level of comfort US has with India's transparency and fairness, compared with China, with whom Washington has been on the verge of an ugly spat over currency exchange rate manipulation. "The differences are mostly defined by the differences in our economies," Geithner said cautiously, reluctant to be drawn into a discussion on China. "We're not going to be talking in India about the exchange rate regime." India, he says, is "becoming more open, runs a flexible exchange rate regime. Its basic pattern in growth has been less export dependent, oriented over time. Different economy, different structure, different choices."

But, wait, the report on whether China is a currency manipulator is now delayed--it will not come out on the 15th after all ....
Meanwhile, according to the Financial Times:

In its latest estimate, the World Bank has predicted a growth rate of 9.5 per cent for 2010, but many analysts predict even faster expansion of the Chinese economy this year.
Growth in the first quarter alone is estimated at between 11 and 12 per cent.
...
But China’s trading partners, particularly the US, fear that its policy of holding down its exchange rate relative to the dollar is driving overseas demand for its exports which, in turn, is fuelling rapid economic expansion and inflation.

The Economist says that even if the April report does not cite China as a currency manipulator, then it will be only to give China one last chance:

The administration’s best hope is that China moves of its own accord before events in Congress or elsewhere force a confrontation. Tim Geithner, the treasury secretary, is surprisingly confident that China will act. Sander Levin, the usually interventionist-minded chairman of the House Ways and Means Committee which oversees trade matters, advocates multilateral rather than unilateral pressure. So perhaps the administration will give China one last chance and seek a multilateral remedy at the G20 in June. If China still fails to respond, the Treasury, by the time of its autumn report, will no longer be able to deny the obvious.

I tell you, we live in interesting times :)

The sorry state of discussions in America :(

It is one thing if illogical and uncivilized remarks are made on Faux News.  But, the following from a banking professional executive is pathetic:

HERE'S something ridiculous:

Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances.

“We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong,” Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China. “We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said.

Two points. First, Mr Krugman's advice to China isn't wrong; it's right. China's currency is undervalued, and I think everyone (including the Chinese, but evidently excluding Mr Roach), thinks that an orderly appreciation of the renminbi would be a net benefit to China. Where I disagree with Mr Krugman is in his advice to America. The currency issue isn't a big enough problem to be worth the risks associated with an aggressive American push to get China to revalue.

Secondly, I think it's very inappropriate to wish violence on anyone, and particularly on a very good economist who is just arguing for what he believes. That's a poor way to conduct discourse, though it's probably a good way to get invited back on a television show.

What a depressing news headline :(

Huge Deficits May Alter U.S. Politics and Global Power

That is the headline over at the NY Times.

My question is this: why the use of "may" and not "will", eh?

American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.
For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.

Again, where from does the NY Times get an optimism to use "may" instead of "will", you ask?  Well, it is at the tail end:

“Much may depend on whether we put in place the financial reforms that can rebuild a functional financial system,” Mr. Galbraith said, to finance growth in the private sector — the kind of growth that ultimately saved Mr. Clinton from his own deficit projections.
His greatest hope, Mr. Galbraith said, was Stein’s law, named for Herbert Stein, chairman of the Council of Economic Advisers under Presidents Richard M. Nixon and Gerald R. Ford.
Stein’s law has been recited in many different versions. But all have a common theme: If a trend cannot continue, it will stop.

I suppose we can expect the dollar to continue to slide down.  Meanwhile, the demographic dynamics of the Euro zone and Japan mean that those economies will slowly lose their influence and so will their currencies.  The Russian demographics are no different.  So, it will all come down to a showdown between China and the US.

And, it does not appear that the Chinese politburo is as stupid as the Soviets were.  Which means chances are pretty good that China will stare us down?  Hmmmm.....

Perhaps I should return to using the line I discontinued, when talking with students: "you are screwed!"

How do you solve a problem like .... China?

The imbalance between production and consumption: a tale of US and China

Robert Reich has a neat observation:

Both societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the U.S., it's a prolonged jobs and earnings recession that, when combined with widening inequality, could create political backlash.

Reich makes a great point that China's export-driven, Yuan-pegged-to-the-dollar, approach that is so much focused on production is a social policy.  Of course, this is not anything new; Friedman, in his metaphor-driven style, compared this to the movie Speed where a minimum speed has to be maintained or else the bus blows up.

But, what is China's endgame in this approach?  Let us say that in 2039 China is one rich country.  Will it still be the Commie-facade economy?  I simply do not understand what is next in China's speeding bus.  The more I think about this, the more I think of my nutty bottom line, and the next game-changing event of history.  And neither one is a good scenario to look forward to.

Mr Obama goes to visit his creditors

Ouch!  Those headline writers in the UK and elsewhere can be brutal .... The title of this post is the editorial in Financial Times.
This editorial is one of the many that point out that we--the world--is in for trouble if the US dollar continues to be the world's currency, if the US continues with its what-me-worry approach, and if China continues to peg its currency to the dollar.

generalised concern about currencies; an as yet incomplete reversal of the strengthening of the dollar during the crisis; and a determination by the Chinese authorities to avoid appreciation against the dollar since the serious crisis began.

What is more intriguing to me is something Dan Drezner wrote about some time ago, where he noted:

It's the rest of the world -- articularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy.  These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports.

The more time goes by, the more I am convinced that my rather nutty conclusion--it seemed like that then--might not be as nutty after all:

Sometimes I wonder whether China's interest in the US dollar, and keeping its yuan tied to the dollar, is to essentially bankrupt the rest of the world and the US so that it can ultimately prevail as the global power.

China's hidden agenda?

Sometimes I wonder whether China's interest in the US dollar, and keeping its yuan tied to the dollar, is to essentially bankrupt the rest of the world and the US so that it can ultimately prevail as the global power.  You think I am nuts?  Not so fast.  Consider the following:

The Economist notes:

The financial crisis has sharpened fears of what Americans often see as another potential threat. China has become the world’s biggest lender to America through its purchase of American Treasury securities, which in theory would allow it to wreck the American economy. These fears ignore the value-destroying (and, for China’s leaders, politically hugely embarrassing) effect that a sell-off of American debt would have on China’s dollar reserves. This special report will explain why China will continue to lend to America

Paul Krugman writes:

If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

To which Dan Drezner adds:

the United States is not the country that's hurt the most by this tactic.  It's the rest of the world -- articularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy.  These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports.

So, now you tell me why my interpretation is screwed!

China and the US: Mutually Assured Destruction!

China is trying to get some momentum going on some kind of a new global currency. Good luck on that. I don't see anybody even shifting big time to the euro, and it was kind of a profound statement that as the world slipped into a deep recession, the dollar started appreciating.

I have blogged before about this, and have quoted James Fallows quite a bit.
Paul Krugman has his comments on it in his NY Times column. Frankly, there is nothing new in Krugman's column--nothing new that Fallows did not describe in his two pieces in the Atlantic. Almost as if Krugman just woke up to this issue; given his Nobel and his public intellectual perch, well, I suppose most of us will always expect a Nobel-prize winning idea in every column, which is not fair to Krugman .... Anyway, an excerpt from Krugman:

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

And the call for some magical solution to the problem of China’s excess of dollars suggests something else: that China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

Bonus for reading until here :-)
The following is an excerpt from Larry Summers' speech five years ago!

I am reluctantly convinced that the most serious problem we have faced in the last 50 years is that of low national saving, resulting dependence on foreign capital, and fiscal sustainability, which has far-reaching implications for the US and the global economy. ....

[Let] us imagine that it were possible at this level of national saving to continue to borrow on this substantial scale to finance investment and that this situation were sustainable into the indefinite future, a situation of which none of us can be confident. Is it healthy for the US economy or for the global system? I would suggest not for three reasons. ....

First, it’s not our capital. The saving rate is what reflects the accumulation of wealth by Americans, and if we are not saving, regardless of how much investment we finance, the returns from that investment will not be available for the United States. Now Pete Peterson would argue—and I think he is right—that the saving rate that is appropriate today in the United States is one that is substantially greater than the rate that was appropriate 10, 20, or 30 years ago because the baby boom generation will begin retiring in 2011. Even if he is not right in that supposition, it is hard to see why wealth and savings should be lower than they have been at any point historically, or how they are going to get better automatically.

Second, a situation of substantial dependence on foreign capital and a substantial current account and trade deficit, when it has taken place in the United States, has historically at every point been associated with a substantial increase in protectionist pressure. Whether the protectionist pressure derives from the relative level of the dollar or the relative level of the trade deficit is a question that econometricians and politicians can debate—I don’t think the data really permit a distinction—but it is hard to believe that the protectionist pressures would be as serious as they are if the United States did not have a trade deficit of the current magnitude, and it is hard to believe that trade deficits of the current magnitude will not lead to increases in protectionist pressure in the future.

The third troubling aspect of this dependence on foreign capital is its geopolitical significance. Here it is most difficult to speak with definitiveness. There is surely something odd about the world’s greatest power being the world’s greatest debtor. In order to finance prevailing levels of consumption and investment, must the United States be as dependent as it is on the discretionary acts of what are inevitably political entities in other countries? It is true and can be argued forcefully that the incentive for Japan or China to dump treasury bills at a rapid rate is not very strong, given the consequences that it would have for their own economies. That is a powerful argument, and it is a reason a prudent person would avoid immediate concern. But it surely cannot be prudent for us as a country to rely on a kind of balance of financial terror to hold back reserve sales that would threaten our stability. (emphasis added)

What if China stopped loaning US?

Jim Fallows explained the mechanics of China and the US in a mutually assured destruction-like financial relationship. In this bizarre relationship, if China decides to pull money out the US, both countries lose.
But, at some point China would have to worry about pouring its hard earned money down the American drain. Bloomberg reports on the opening shot; here is an excerpt:

China’s Premier Wen ‘Worried’ on Safety of Treasuries (Update2)

By Belinda Cao and Judy Chen

March 13 (Bloomberg) -- China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

White House National Economic Council Director Lawrence Summers, asked about Wen’s remarks, said overseas “confidence” in Treasuries would be hurt without the administration’s steps to end the economy’s decline. President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of debt sales to fund a $787 billion stimulus package.

“China’s purchases of American debt have been one of the few bolts keeping the wheels on the global economy,” said Phil Deans, a professor of international affairs at Temple University in Tokyo. “If China stops buying, where does Obama’s borrowing to fund his stimulus come from?

Change is coming. Soon. And we won't like it.

Sino-American tensions .... continued

Commentators are all over the place ever since Tim Geithner referred to China's currency manipulation. Charles Wallace has an interesting point, which I have not seen elsewhere:

An anomaly of Geithner's remarks to the Senate finance committee last week was his comments on the dollar. After accusing China of manipulating its currency, he declared that "a strong dollar is in America's best interests" (the same thing that Paulson used to say repeatedly). The Chinese must be scratching their heads over that comment: Do the Americans want a strong dollar or a strong yuan? As the new overseer of U.S. currency policy, Timothy Geithner is not making much sense.

China, America, and tensions

We forget that before 9/11, which was fateful in many ways all across the world, the US-China relations were absolutely tense.  Remember the military incident on China's Hainan Island?  PBS' Frontline had a fantastic piece on the importance of this a couple of years ago.  That was in April 2001--only a couple of months into Bush's presidency.  It seemed like the decade would be one of economic, political, and military confrontation with China.

Everything changed only a few months later, on September 11th.  In the nearly seven years since the Hainan Island incident, China has become one money-generating machine from which America borrowed like crazy.  Taiwan, which was the reason why that Hainan incident happened, became a far less important issue compared to Al-Qaeda, Iraq, Afghanistan, Pakistan, Iran, North Korea.

Now, all these geopolitical issues have not gone away.  But, we seem to be starting the new presidential administration with a warning shot to China.  Only, this time it is not at all about Taiwan, but about China's economic policies.  

The Washington Post reports:

As Timothy F. Geithner moved closer yesterday to confirmation as Treasury secretary, he signaled a more confrontational approach toward China, bluntly stating that the new administration thinks Beijing is "manipulating" its currency and it will act "aggressively" using "all the diplomatic avenues" to change China's currency practices.

James Fallows, who has written extensively on China, is not at all happy with this memo to China.  He writes:

we've got a situation where a journalist (moi-meme) is listening to a renowned expert and wondering, Can he possibly believe that things are as simple and bald as what he's just said?

The expert in question is our old friend Timothy Geithner, who when he was not being grilled about his tax problems today was saying (in his written answer to questions) that China is"manipulating" its currency. Oh my. Where do we start with this.

- That the Chinese government manages the value of the RMB against the US dollar and other currencies is not an accusation but an observation of universally-accepted plain fact. Until about three years ago, the RMB's value was flat-out pegged against that of the dollar, at a rate of just over 8:1.  Was that "manipulation"? Yes, in the same sense that the yen was for years "manipulated" at a steady rate against the dollar, or perhaps in the sense that the US "manipulates" its national borders by controlling them. 

Fallows goes on to list many more wonderful points, before concluding:

I lack the energy to go any further down this list, and this is enough to make the point. These are just a tiny few of the factors that go into any US government consideration of how the RMB/dollar relationship affects the economies of both countries. And to boil it down to the bald assertion that "China is manipulating its currency" ignores, vulgarizes, and misconstrues a lot more than it clarifies. 

Hey, it seems to be a strange new year (year of the ox) greeting from the US!