dollar

In his New York Times column today, Paul Krugman writes about the problem of macroeconomic imbalances between China and the United States.  Which is fine, except he wrote the exact same column last month.  Just like last month's column, this one makes some good points and fails to mention some important dynamics.  Beyond the inclusion of a useful footnote, however, there's nothing new here. 

As part of an ongoing public service to busy readers of Foreignpolicy.com, the hard-working staff here at the blog is ready to help you bypass the chore of having to read the same Krugman column time and again with this handy-dandy crib sheet.  My guess is that the next six months' worth of Krugman columns will boil down to the following assertions:

1. The root of macroeconomic imbalances is the Chinese (undervalued) peg to the dollar;
2. Obama and Geithner should be "tough" on China's dollar policy;
3. Concerns about incipient U.S. inflation are... er... inflated;
4. That goes double for long-term concerns about rising debt levels;
5. The February 2009 stimulus was too small;
6. The Republicans are blinkered;
7. The Obama administration should act in a more partisan and progressive manner. 

Now, let me stress that I agree with 1, 3, and 6 at this point, and I'm agnostic on 4 and 5, so it's not like Krugman is wrong in what he's saying.  It's just that he's saying the same damn thing over and over again. 

Following up on my dollar post from earlier this week, I see that Paul Krugman is talking a related issue in his New York Times column today -- the refusal of the renminbi to depreciate against the dollar:

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.

Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

Krugman then goes on to excoriate the U.S. Treasury department for not upbraiding the Chinese more on this. 

Fair enough, but the thing is, the United States is not the country that's hurt the most by this tactic.  It's the rest of the world -- particularly 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. 

This leads to the title of this post.  Krugman presumes that the U.S. has the strongest incentive to talk to China about this issue.  If one thinks of the U.S. acting as the hegemon, that's possibly true.  As a matter of direct economic interest, however, why haven't the Europeans and East Asians been screaming bloody murder about this?  China's policies are forcing them to take actions they don't want to take -- so why aren't they complaining more loudly about this? 

Why? 

Over at Politico, Eamon Javers notes an odd trend in the Drudge Report: 

On Tuesday, Matt Drudge ran a headline about the weakening U.S. dollar on his website, Drudgereport.com. In and of itself, that would be unremarkable, except that it was the 18th time Drudge had posted a link to a story about the weak dollar this month.

And October was only 20 days old.

Clearly, Matt Drudge has developed a fascination with the declining U.S. dollar.

“He’s fixated on it,” said Tom Rosenstiel, director of the Pew Research Center’s Project for Excellence in Journalism. “There’s no question that Drudge can alter what people are paying attention to.”

Market watchers say it’s unlikely that Drudge is actually moving the currency markets with his relentless attention.

“I don’t think that anyone who seriously trades currencies reads The Drudge Report before making important buy or sell decisions,” said Chris Roush, a professor of business journalism at the University of North Carolina at Chapel Hill. (emphasis added... because that's a priceless quote)

Drudge isn't the only one obsessed about the dollar.  Last week, James Pethokoukis blogged the following for Reuters: 

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

OK, let's be as plain as possible about this - as a reserve currency, the dollar is not going anywhere.  Really. 

The dollar's slide in value has been predictable, as the need for a financial safe haven has abated.  By and large, a depreciating dollar helps the U.S. trade balance (though it would help much more if the Chinese renminbi got in on the appreciation).   

Even the Chinese, who have spoken like they want an alternative to the dollar as a reserve currency, are in point of fact not doing much to alter the status quo.  Why?  To paraphrase Winston Churchill, the dollar is a lousy, rotten reserve currency - until one contemplates the alternatives. 

Because all of the alternatives have serious problems.  The euro, the only truly viable substitute for the dollar, is not located in the region responsible for the largest surge of growth.  It would be unlikely for the ASEAN +3 countries to agree to switch from the dollar to a new currency over which regional actors have no influence (the Europeans wouldn't be thrilled either, as it would lead to an even greater appreciation of the currency).  Oh, and the European Union has no consolidated sovereign debt market.  The euro is worth watching, but it's not going to replace the dollar anytime soon.  

The other alternatives are even less attractive.  Most other national currencies beyond the euro - the yen, pound, Swiss franc, Australian dollar - are based in markets too small to sustain the inflows that would come from reserve currency status.  The renminbi remains inconvertible.  A return to the gold standard in this day and age would be infeasible - the liquidity constraints and vagaries of supply would be too powerful.  There's the using-the-Special-Drawing-Right-as-a-template-for-a-super-sovereign currency idea, but this is an implausible solution.  As it currently stands, the SDR is not a currency so much as a unit of account.  Even after the recent IMF authorizations, there are less than $400 billion SDR-denominated assets in the world, which is far too small for a proper reserve currency. 

So, what's really going on here with the dollar obsession?  I suspect that with the Dow Jones going back over 10,000, Republicans are looking for some other Very Simple Metric that shows Obama Stinks.  The dollar looks like it's going to be declining for a while, so why not that?  Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now. 

The thing is, I'm not sure this gambit is going to work.  People who already think Obama is a socialist will go for it, sure, but that's only rallying the base.  I'm not sure how much fence-sitters care about a strong dollar, however.  If anything, populist movements tend to favor a debasing of the currency rather than a strengthening of it. 

Still, I'm just a political scientist -- I'm sure that, "theories on political behavior are best left to CNN, pollsters, pundits, historians, candidates, political parties, and the voters." 

So, have at it, readers!  Will the falling dollar be a source of populist outrage if Drudge links to it enough? 

UPDATE:  contrasting takes from Kevin Drum and Megan McArdle. 

For the past week, your humble blogger has not been blogging from home, but rather in the Swiss city of Basel (for those speaking German), also called Basle (for those speaking French), teaching a summer course on the global political economy.

[Ahem, weren't you doing this in Barcelona a few weeks ago?--ed.  Um... well... yes.  I know, I know, my life really sucks right now.]

My students this time are a bit more homogenous -- 85% Swiss, with a few Germans and the stray Russian thrown in. A few minor notes: 

1.  Maybe it's because they're Swiss, but the whole "Americans are manipulating the world" meme isn't as powerful here as it was in Barcelona.  I've been asked the occasional question about the military-industrial complex causing the Iraq War, and one student asked me about whether central bankers timed certain moves to bail out rich bankers during the Great Depression. Those were outliers, however.

2.  Man, if you think the bank bailouts are unpopular in the United States, try the Swiss reaction to the Swiss federal government's bailout of UBS.  It's to the Voldamortian point where they asked me not to say "UBS" because it's so embarrassing. We have compromised -- I can now say "UBS," but must then spit three times over my right shoulder to ward off evil spirits.

3.  McDonald's is the most ubiquitous U.S. multinational in Europe, but I must say I'm impressed at the expanding reach of Starbucks. They now have coffeehouses in 15 European countries. This is pretty surprising to me, because it's not like they have a shortage of good coffee on this continent.  It's not cheap, either -- a tall latte goes for about $6.50 here. 

How can they do this? I don't think it's the superior quality of the coffee -- I don't dislike Starbucks, but speaking personally, I prefer Illy and/or Peet's. 

Rather, I would chalk it up to two other reasons. First, the cafes themselves are quite friendly and open -- chalk a victory for Virginia Postrel here. Second, local cafes don't have anything that approximates the frappuccino. [Aha!!  The secret American plan to fatten up Europeans is working!!--ed.  Shhhh.......]

UPDATE:  A source based in Geneva e-mails an additional explanation for the European success of Starbucks: 

My strong sense of Starbuck's success here is that they have wifi and cheesecake. Forget the coffee - the foreigners love it because it's familiar, and young Swiss who've traveled, because it's fun. But everyone I know goes there mainly because of the easy and free connection plus seats that work if you have a laptop. I often meet people there - Lausanne or Geneva - for informal business meetings.

The Financial Times' Peter Garnham reports that China is getting serious about internationalizing the use of the renminbi:

China has kick-started a major plan to internationalise the renminbi and the process is likely to be faster than many expect, according to HSBC....

“China is beginning an ambitious scheme to raise the role of the renminbi in international trade and finance and to reduce reliance on the US dollar,” said Qu Hongbin, China chief economist at HSBC.

“This will likely be a multi-year and gradual process. Yet, we believe the pace is likely to be faster than many expect.”

HSBC said the internationalisation of the renminbi was long overdue, given China’s rising economic power relative to the limited use of the renminbi overseas.

If you read the whole story, you discover that the FT's evidence for this assertion rests entirely on assertions by HSBC officials.  Which leads one to wonder whether maybe, just maybe, the FT should have checked to see whether HSBC has any financial stake in globalizing the use of the renminbi. Crazy talk, I know...

Loyal readers are surely aware that this is not the first time the Financial Times has hyperventilated over Chinese moves that don't necessarily amount to all that. 

Now before anyone accuses me of going all Brad DeLong on the FT, I think a lot of their China coverage (particularly by Jamil Anderlini and Geoff Dyer) has been very informative.  That said, this kind of thinly sourced story does lead one to wonder just how much of the coverage of China's financial moves is hype from financial players with a vested interest in feeding the China bubble. 

Readers -- am I underreacting to this? 

My latest Newsweek column is online.  It looks at China's recent moves to challenge the dollar's status as the world's reserve currency and what to make of them.

The closing paragraphs: 

If these moves do not amount to much, then why all the hubbub? To be blunt, America is out of practice at dealing with an independent source of national power. For two decades the United States has been the undisputed global hegemon. For the 40 years before that, America was the leader of the free world. As a result, American thinkers and policymakers have become accustomed to having all policy decisions of consequence go through Washington. Our current generation of leaders and thinkers are simply unprepared for the idea of other countries taking the lead in matters of the global economic order.

Most of China's recent actions do not constitute a real threat to the United States; indeed, to the extent that China helps to boost the economies of the Pacific Rim, they are contributing a public good. Obama—and Hunstman—need to make the mental adjustment to a rising China, welcoming many of China's policy initiatives while pushing back at those that threaten American core interests. If they can make this cognitive leap, then Sino-American relations can proceed on the basis of shared interests rather than mutual fears.

Go read the whole thing. 

The New York Times runs two op-eds today on the future of the dollar's status as the world's reserve currency, particularly with regard to China. 

Victor Zhikai Gao's essay doesn't actually say a whole lot on the matter, except for this excerpt: 

Beijing recently called for a greater role in international trade for the special drawing rights currency of the International Monetary Fund. But China is also fully aware that the United States can veto an I.M.F. decision. China’s call was more meant to sound an alarm to the United States.

Many Chinese people increasingly fear the rapid erosion of the American dollar. The United States may want to consider offering inflation-protection measures for China’s existing investments in America, and offer additional security or collateral for its continued investments. America should also provide its largest creditor with greater transparency and information.

As Brad Setser points out, it's a bit rich for the Chinese to fret about U.S. inflation, since if the renminbi started appreciating, many of the macro imbalances currently plaguing the international monetary system might be lessened.  Of course, talking about "currency appreciation" puts the onus on Beijing, while talking about inflation conveniently puts the onus on the United States.  

The other op-ed is by Nouriel Roubini -- a.k.a., Dr. Doom.  It's a good primer on the benefits that accrue to the United States from having the dollar as the world's reserve currency.  That said, this part confused me: 

We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports (emphasis added).

The other parts of that paragraph make sense, but that last sentence mystifies me.  Wasn't part of the reason that oil and other commodity prices spiked last year was the declining value of the dollar? 

In general, both op-eds urge the U.S. to get its financial house in order.  I certainly don't disagree with that recommendation.  Still, it's a bit disingenuous to suggest that the U.S. is the only country at fault for the current overhang of dollar reserves.  Beijing needs to take a good hard look in the mirror on this issue. 

One of the great ironies about the Sino-American financial relationship is that most Americans believe that China has been screwing the U.S. over through their massive accumulation of dollars, while most Chinese believe that America has been screwing China over through.... their massive accumulation of dollars. 

Well, what if the accumulation is not so massive?  Yesterday's New York Times story by Keith Bradsher suggested that China was buying far fewer dollars than it used to, and therefore we can all breathe easier about China using its dollar holdings as a form of foreign policy leverage:

Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.

The main effect of slower bond purchases may be a weakening of Beijing’s influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank.

Asked about the balance of financial power between China and the United States, one of the Chinese government’s top monetary economists, Yu Yongding, replied that “I think it’s mainly in favor of the United States.”

He cited a saying attributed to John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”

I don't disagree with Yu, but I do disagree with Bradsher.  It's necessary to separate China's willingness to use its reserves as a lever from the expectation that such a lever will net it significant concessions. 

As long as China is heavily dependent on the U.S. market as a source of economic growth, it is fundamentally constrained in using its reserves in a strategic manner.  Regardless of its feelings towards the United States, Beijing will not take actions that shoot itself in the economic foot. 

If, however, China manages to decouple its economy somewhat from the U.S. market, then the calculus of compellence changes.  Such a decoupling would contribute to the unwinding of the macroeconomic imbalances caused by the Bretton Woods II arrangements.  It would also reduce whatever constraints economic interdependence has placed on China's financial statecraft.  

This is the paradox -- the more leverage China has, the more reluctant it will be to use it.  The more willing China is to use its reserves in a strategic manner, the less likely such statecraft will yield anything in the way of meaningful concessions. 

[This sounds.... familiar.--ed.  Oh, shut up.]