Paul Krugman and Dean Baker call China's bluff on currency manipulation

[rhombus]

Paul Krugman:

In debates over what to do about China’s currency manipulation, one constantly hears the refrain that we don’t dare alienate the Chinese, because they own so much of our debt. What would happen if they took their dollar holdings, equal to around 10% of US GDP, and switched them into other currencies?

Well, we don’t have to speculate. Consider the case of Israel, which in the face of the economic crisis engaged in massive foreign currency intervention to weaken the shekel. What happens in a foreign currency intervention is that the central bank buys foreign securities while selling domestic securities — that is, the Bank of Israel was doing, as a deliberate policy, exactly what we’re supposed to fear the Chinese doing.

Right now, China’s dollar holdings don’t give it any leverage over the United States. On the contrary, by dumping dollars China would be doing us a favor.

http://krugman.blogs.nytimes.com/2010/03/14/israel-china-america/


Dean Baker:

While Washington is chock full of deficit hawks running around insisting that we have to cut Social Security and Medicare or China will stop investing in the U.S., they actually have the story completely backward. (It is necessary to talk slowly when speaking with deficit hawks. Remember, these people could not see an $8 trillion housing bubble.) The United States has absolutely nothing to fear from China's decision to reduce its investments in the United States and allow the dollar to fall and the yuan to rise.

This decision would mean that the United States could finally get its trade deficit down to a manageable level. The trade deficit has been the leading imbalance in the U.S. economy over the last decade. The large trade deficit required very low private savings and/or large budget deficits. This is an accounting identity. If the country is a net borrower from abroad (this is what a trade deficit means), then it must have low national savings. There is no way around this story.

http://tpmcafe.talkingpointsmemo.com/2010/03/14/pledge_to_chinas_leaders_you_will_lose_money_on_go/#more



American manufacturing sector has been decimated by China's continued currency manipulation and so-called 'Free' Trade deals like NAFTA.

[smiley_glad_hands]

1. Now cue the china apologists.

With links to Wikipedia highlighting how china invented the spoon.