Usually journalists are in the position of being told that they have lamentably "oversimplified" or "hyped" their discussion of topics -- and told this by the real policy experts in academia or think tanks or specialized government agencies. Often enough, the accusation is true. Part of journalism's basic function is to explain, in simpler (and often necessarily less nuanced) terms, what the real experts are trying to say. If they do that well enough, they can reach people who would never sit still for the full, rococo, expert version and give them a better understanding of important ideas and problems than they would otherwise have.
But now 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. Here's the basic pattern of the dollar's value against the RMB from mid-2003 to mid 2008 (via Yahoo Finance), with the big change to a "managed float" happening in the middle of 2005. It went from more than 8 RMB to a dollar, to less than 7, during this period:
(Update note: There is no Y-axis scale on the left side of this chart, because I couldn't find a chart with a scale at the time. But as noted above, the chart shows a decline from about 8.2 RMB/$1 to about 6.8/1 -- so the dollar lost about 1/5th of its value against the RMB, not 90% as this truncated chart might suggest. Still, the main point is the change from the absolute peg of the pre-2005 years to the managed float since then.)
So, to the completely obvious extent that the Chinese government was manipulating (ie, fixing) the value of the RMB before 2005, they're manipulating it less now. Obviously they are preventing it from rising as fast as it would in an entirely uncontrolled market exchange, but again that's hardly secret from anyone on earth.
- Is the Chinese suppression of the RMB's value a fundamental reason Americans don't sell more goods there? It makes a difference but -- as I argued at very great length in this article two years ago, it's nothing close to being the main reason. Wage rates, Chinese infrastructure, US fiscal patterns, and a lot of other factors play a huge part. Details too exhaustive to go into here.
- Is the Chinese determination to control the RMB's value within a set band an important factor in current world financial patterns? In this article I argued that it was, but in the non-obvious way of directing the fruits of China's labor disproportionately into foreign investment rather than higher living standings for its own people. That is, "manipulating" the currency has been an important part of subsidizing US living standards in recent years. Details in the piece.
- Could a Chinese government attempt to protect its own recently-ravaged manufacturing work force by pushing the RMB's value back down -- after many years of letting it drift higher -- cause problems for the rest of the world? Yes indeed -- as explained in this very valuable post by the Beijing-based financial authority Michael Pettis. So they should be strongly discouraged from doing so.
- Do we think that the Chinese authorities who have put some $2 trillion into US assets will respond blandly to being labeled manipulators -- or to a policy that would effectively devalue the investments they've already made here? If Americans think that, they're naive -- in my view, based on this interview with a man at the center of Chinese decision making.
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.
Oh well. My personal pledge: as many cheery things as possible to say about our future Treasury Secretary from this point on. We all have a stake in his success -- including the "manipulative" Chinese!
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