My column for The Week suggests that the dollar is actually NOT the world’s most troubled currency …
By keeping its currency undervalued, China imports inflation. Monetarists look at recent U.S. money creation — to shore up the sagging economy, the Fed has pumped $2 trillion into the financial system in the past year — and wonder: “Where’s that inflation?”
Answer: in China. While the Chinese run their printing presses to match ours, they do so under markedly different circumstances. China’s economy is growing, not contracting, and their monetary velocity remains stable while ours has dropped. By continuing to dump under-priced Chinese goods on world markets, China risks a gathering asset bubble inside China. It’s a tough dilemma for them — and one that they can only resolve by making the fateful decision to become something more like a normal economy with normal patterns of consumption and domestic-led growth.
When that happens, Americans will pay more for Chinese-manufactured goods at Wal-Mart. Meantime, they’ll pay more for a lot else, too. It’s going to be an uncomfortable decade for Americans with a taste for foreign goods and travel, and a long season of bargain-hunting for foreign buyers of dollar-denominated assets.
Take it from a Canadian who earned a lot of his living in 62-cent Canadian bucks back in the 1990s: a cheap dollar is no fun at all. But for the United States today, it is essential to recovery — almost as essential as a higher Chinese currency is in order to prevent the mother of all asset bubbles from popping in the mother of all asset crashes on the Pacific’s opposite shore.
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1 response so far
1 sinz54 // Nov 19, 2009 at 10:09 am
There’s a reason they’re not revaluating their currency upward.
Because in the meantime they are dramatically restructuring their entire nation for the 21st century. Highway building is everywhere. New power plants are everywhere, from hydroelectric to wind power. High-speed rail (220 mph) is everywhere. Their economy is expanding dramatically and so is their rate of productivity. That’s absorbing a lot of this so-called “inflation.” They don’t yet have too much money chasing too few goods. They’ve got too much money chasing a whole lot of goods, which is staving off that day of reckoning.
They’ll get around to it. But by then, China will be the rising superpower, and we’ll be the declining superpower–if we don’t change things here in America.
We’re now in the same position as the British Empire was 1oo years ago: Still dominant worldwide, but with new upstarts (back then, the U.S.) impressing everyone as the countries of the future. In the 19th century and the early 20th century, the American money supply had expanded dramatically too. But we didn’t have hyperinflation. Because AMERICA itself was expanding dramatically. We got rid of those Indians and took their land for ourselves and exploited it. We took parts of Mexico for ourselves. America was booming everywhere, progress everywhere.
That’s what China is doing now. They’re using our playbook from the 19th and early 20th century.
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