A trade deficit is one of the biggest economic problems a nation can experience and literally means that all of the currency will eventually leave the country.
Ie. The US has a 500b trade deficit. Each year 500b leaves this country. The reason we're able to grow GDP is because the government sells bonds to fun a deficit. If the trade deficit is 500b and we sell 1t worth of bonds we still have a net income of 500b. The trade deficit doesn't matter to the current economy.
The problem is you can't sell bonds forever and the country is going bankrupt sustaining increasing debt payment and increased trade deficits.
This country will go bankrupt if it continues to run a trade deficit. There's nothing you can do to prevent it except to tax imports to balance the trade against countries that devalue their currency.
My understanding is that the relative value of different currencies (what we're talking about here) is a different (but somewhat related) thing to inflation within a currency. But yeah, in this case, a stronger yuan would cause prices of Chinese manufactured goods sold in the US to rise. So yeah, that'd contribute to inflation, but my understanding is that significant long-term inflation is... difficult without wage inflation, so it'd probably be more like the commodity inflation we've experienced, where prices went way up then stayed flat or came back down; they didn't keep going up.
Of course, /if/ policymakers get their way and more manufacturing jobs are moved back to the US, in the best case that could cause demand for unskilled workers to rise, and maybe we'd see some wage inflation; but that sounds ridiculously over optimistic to me. We have a lot of 'discouraged workers' on the sidelines who will come back if they think they have a chance at a job.
I think you nailed the effect, just have to combine the two: both forms of inflation could occur. First through prices as consumer goods become more expensive, then later through increased wages to compensate as well as capture some of the excess returns capital earns. In the textbook version, we'd end up in the same spot.
First of all, isn't pinning the Chinese currency to the US dollar against WTO rules?
It is important to note that in order to pin the Chinese currency to the US dollar, China must regularly print more and more money, and then they buy US debt with it.
Considering that 10-year US bonds are at staggeringly low interest rates (1.91% as I write this), they're basically giving us free money every time they do this. Why aren't we spending more federally on job programs to get people employed (and/or trained for employment)? Oh yeah, because >socialism<.
China doesn't have to print money to buy US debt; it has massive amounts of foreign currency reserves from the trade imbalance between the countries with which it purchases treasuries. Something to the tune of $1 trillion USD.
So, in essence, the US is printing money to provide China with treasury assets.
EDIT:
Also, I guess you could qualify it as getting free money, but in fact it's money that has already been spent, which is the federal deficit. So what happens when China decides to stop buying that debt? Then we no longer have the money to cover our over-spending. That's the issue. The economic argument lies on whether China will ever consider the US a "bad bet" and stop buying debt (it has, in fact, slowed) or if the two countries are so intertwined as creditor-debtor that both have to continue playing the game in perpetuity.
China HAS to print to keep the yuan at parity with the USD. China has already stopped buying US debt and are diversifying it's holdings. If China took all fo the trade deficit, which is close to 300b yearly, and bought US treasuries with it, it may supress the valuation of the yuan. Since it's not the case and the yuan strength is not fixed to US trade but it's global trade, the yuan would still likely appreciate significantly.
So in fact China must print yuan to sustain parity with USD otherwise the yuan would rise in value. It's holdings of foreign debt and currency only bolster the stance that the yuan is undervalued.
The only direction the yuan has gone in the last 10 years is up. When the Chinese alter the USD peg. The yuan is not floating.
There is always somewhere else to move to, unless US labour becomes cheap compared to ALL other countries. The solution is not to make all other countries expensive, or make US labour cheap (through currency depreciation or what not).
I believe the best way out is through technological innovation, increase export in high-end products to reduce trade deficit. Although that would require patience and long-term thinking, which is going to be very difficult in current political climate.
I agree that forcing Beijing to raise the value of the Yuan is not going to end all our financial woes (as suggested by some politicians) and turn America back into a manufacturing powerhouse. Many companies (recently Nokia) have been moving their factories to Vietnam as wages there are lower than even China.
In a recent interview between Marc Benioff (salesforce.com's CEO) and Eric Schmidt (former CEO of Google), Eric said that oftentimes outsourcing is not just because of cheap labor, but rather because America doesn't have the infrastructure or skills necessary to perform the kind of manufacturing necessary in high tech industries (think printed circuit boards, which are done exclusively in Asia nowadays).
Given America's emphasis on education (or lack thereof), I don't see this changing anytime in the near future. Troubling news indeed.
The issue is that if any one country becomes a manufacturing powerhouse, with the economics of a trade surplus, it is almost a given that the trade balance will correct itself.
You don't get the point of this leglislatiob. Trade normally corrects itself through currency strength. The Chinese artificially supress their currency. This causes a the continuation of a trade deficit which will eventually destroy the economy of the country running the deficit.
It's not as simple as manifacturing will go somewhere else, what problem does it solve. No, not that simple. Sorry.
That does depend on other countries buying those high-end products, instead of simply reverse-engineering them or stealing the designs and manufacturing them at lower cost within protected domestic industries. China's highly protectionist industrial policy only allows foreign products into the country so that they can coerce their producers into transferring the technology to Chinese competitors.
If China raise the value of their currency too quickly they plunge hundreds of millions of people into dire poverty. (We are talking more people than in the entire US). Just so the U.S can reduce its deficit, and generate local jobs growth...
"I want globalism... but only as long as it benefits me, and you play by my rules"
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[ 3.2 ms ] story [ 34.1 ms ] threadIe. The US has a 500b trade deficit. Each year 500b leaves this country. The reason we're able to grow GDP is because the government sells bonds to fun a deficit. If the trade deficit is 500b and we sell 1t worth of bonds we still have a net income of 500b. The trade deficit doesn't matter to the current economy.
The problem is you can't sell bonds forever and the country is going bankrupt sustaining increasing debt payment and increased trade deficits.
This country will go bankrupt if it continues to run a trade deficit. There's nothing you can do to prevent it except to tax imports to balance the trade against countries that devalue their currency.
Of course, /if/ policymakers get their way and more manufacturing jobs are moved back to the US, in the best case that could cause demand for unskilled workers to rise, and maybe we'd see some wage inflation; but that sounds ridiculously over optimistic to me. We have a lot of 'discouraged workers' on the sidelines who will come back if they think they have a chance at a job.
It is important to note that in order to pin the Chinese currency to the US dollar, China must regularly print more and more money, and then they buy US debt with it.
Considering that 10-year US bonds are at staggeringly low interest rates (1.91% as I write this), they're basically giving us free money every time they do this. Why aren't we spending more federally on job programs to get people employed (and/or trained for employment)? Oh yeah, because >socialism<.
So, in essence, the US is printing money to provide China with treasury assets.
EDIT:
Also, I guess you could qualify it as getting free money, but in fact it's money that has already been spent, which is the federal deficit. So what happens when China decides to stop buying that debt? Then we no longer have the money to cover our over-spending. That's the issue. The economic argument lies on whether China will ever consider the US a "bad bet" and stop buying debt (it has, in fact, slowed) or if the two countries are so intertwined as creditor-debtor that both have to continue playing the game in perpetuity.
So in fact China must print yuan to sustain parity with USD otherwise the yuan would rise in value. It's holdings of foreign debt and currency only bolster the stance that the yuan is undervalued.
The only direction the yuan has gone in the last 10 years is up. When the Chinese alter the USD peg. The yuan is not floating.
No exactly. China provides US with goods produced in China in exchange for treasuries printed in the US (goods -> dollars, dollars -> treasuries).
I believe the best way out is through technological innovation, increase export in high-end products to reduce trade deficit. Although that would require patience and long-term thinking, which is going to be very difficult in current political climate.
In a recent interview between Marc Benioff (salesforce.com's CEO) and Eric Schmidt (former CEO of Google), Eric said that oftentimes outsourcing is not just because of cheap labor, but rather because America doesn't have the infrastructure or skills necessary to perform the kind of manufacturing necessary in high tech industries (think printed circuit boards, which are done exclusively in Asia nowadays).
Given America's emphasis on education (or lack thereof), I don't see this changing anytime in the near future. Troubling news indeed.
You don't get the point of this leglislatiob. Trade normally corrects itself through currency strength. The Chinese artificially supress their currency. This causes a the continuation of a trade deficit which will eventually destroy the economy of the country running the deficit.
It's not as simple as manifacturing will go somewhere else, what problem does it solve. No, not that simple. Sorry.
If China raise the value of their currency too quickly they plunge hundreds of millions of people into dire poverty. (We are talking more people than in the entire US). Just so the U.S can reduce its deficit, and generate local jobs growth...
"I want globalism... but only as long as it benefits me, and you play by my rules"