November 21, 2009 -During President Obama's high profile visit to China this week, the most frequently discussed, yet least understood, topic was how currency valuations are affecting the economic relationship between the United States and China. The focal problem is the Chinese government's policy of fixing the value of the renminbi against the U.S. dollar. While many correctly perceive that this 'peg' has contributed greatly to the current global imbalances, few fully comprehend the ramifications should that peg be discarded....
......However, this does not mean that I want the Chinese to maintain the status quo. In the long run, the U.S. economy will benefit from the abandonment of a system that guarantees our dependency and inevitable downfall. De-pegging will force the hand of U.S. politicians toward pursuing realistic policies. The Chinese will come to their senses eventually because it is in their interest to do so. Meanwhile, the longer the peg is maintained, the more indebted we become, the more out of balance our economy grows, and the more our industrial base shrivels. In short, the longer they wait, the steeper our fall.
A weaker dollar will price many imported products beyond the reach of most Americas, giving our hollowed out manufacturing sector the opportunity to rebound. However, if our industry has any chance of getting off the mat, we must reduce taxes, repeal regulations, reform our cumbersome legal system, and, most importantly, replenish our savings to finance the necessary capital investment.
If we position ourselves to deal with the consequences, tough love from China will provide a path back to genuine economic growth. However, if our politicians continue to misread the problem and push us deeper in the red, the inevitable 'rebalancing' could be truly ruinous.
......However, this does not mean that I want the Chinese to maintain the status quo. In the long run, the U.S. economy will benefit from the abandonment of a system that guarantees our dependency and inevitable downfall. De-pegging will force the hand of U.S. politicians toward pursuing realistic policies. The Chinese will come to their senses eventually because it is in their interest to do so. Meanwhile, the longer the peg is maintained, the more indebted we become, the more out of balance our economy grows, and the more our industrial base shrivels. In short, the longer they wait, the steeper our fall.
A weaker dollar will price many imported products beyond the reach of most Americas, giving our hollowed out manufacturing sector the opportunity to rebound. However, if our industry has any chance of getting off the mat, we must reduce taxes, repeal regulations, reform our cumbersome legal system, and, most importantly, replenish our savings to finance the necessary capital investment.
If we position ourselves to deal with the consequences, tough love from China will provide a path back to genuine economic growth. However, if our politicians continue to misread the problem and push us deeper in the red, the inevitable 'rebalancing' could be truly ruinous.
