Thursday, April 28, 2011

China’s Monetary Policy Is Fine, No Need for Her Currency to Float

Contrary to the conventions and misguided wisdom, China is wrongly criticized for not allowing her currency to float. This is absolutely misguided and is based on the simple, yet incorrect, assumption that the more Chinese goods cost, the less quantity of them we will buy, and the cheaper our goods are, the more quantity of USA products we can sell. The theory goes that if currencies float freely, trade deficits will decrease, and more Americans will get jobs. Historically, this hasn't worked. Closer examination of the underlying theory explains why. If the Chinese currency floats freely, we will just spend more money for the same amount of goods, further aggravating our balance of trade deficit.

At the theoretical level, it assumes that certain goods are like freely tradeable, completely available commodities like Gold. A bar of gold is a bar of gold, and there is an ample supply if you are willing to pay for it. Chinese goods, like oil, are not similar commodities where market forces will solve all problems. There is a limited supply of oil, regardless of the price. The US is in no position to substitute domestic production of goods for cheaper imported goods, especially those imported from China.

First and foremost, given what we pay and buy for Chinese goods, a price increase will not diminish demand. We will just pay more money for the same things, and thus have less money for others. Why is this? Because imported Chinese goods are not substitutable for USA made goods. Whether a Chinese worker is paid $1,000 US Dollars a month for wages, or $1,200 a month for wages, we still can't compete. Our workers are simply not prepared to work in factories for minimum wage and produce low cost goods.

Out strength lies in higher end, high technology goods, which is the reason we should focus our policies on education and on research into cutting edge technologies and into supporting the later. For example, the airline industry is a perfect example. Since the invention of the airline, until Airbus, only the USA manufactured and produced the largest and most technology advanced aircraft, especially for commercial (non-military) uses.

There are other structural reasons as well. Our economy is structural and not easily changed. Even if the price of goods suddenly shot up, we can't just build factories for low cost substitutes for imported Chinese products.

Imported oil is a perfect example. We need what we need, and we will purchase what we need, as long as we have the money to do so. Being an affluent country, we have many assets. When the price of oil rises, as it has, we do not stop driving or filling our gas tanks. The tremendous rise in the costs of a gallon of gasoline caused us to complain and hurt our wallet, but we have not cut our use of our automobile.

Not allowing their currency to float actually hurts the Chinese. By selling their goods at an artificially low price, they are only throwing away hard currency revenues which would make their country richer and more affluent. Since quantity of exports won't diminish, we would just pay more for each item exported. The Chinese would have more money without losing exports. There mistake is our benefit, and that is a shame. Because we have no one to blame but ourselves and our complacency and laziness. On the other hand, no people have suffered so extensively (much of which suffering was at the hands of foreign powers including the Western countries and their allies) as much as the Chinese for thousands of years, yet are so decent and hardworking and ethical. They have an ancient culture which was prescient and enlightened and very ethical which remains engrained in the lives of the Chinese to this day. They remain poor and suffering, and deserve to have decent lives.\
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首先,由于我们的支付和购买中国商品,价格上涨不会减少需求。同样的事情,我们只是将支付更多的钱,从而较少的钱为他人。这是为什么?由于进口中国商品为美国制造的商品替代。无论是中国工人支付$ 1000美元为一个月的工资,或工资每月1200美元,我们还不能竞争。我们的工人根本不准备在工厂上班,最低工资和生产成本低的商品。






  1. I never saw the issue from this point of view. Perhaps you are right.

  2. No one, either Republican or Democrat, makes the arguments you do, but you make more sense, especially after reading your other Blog.

    It is time to stop blaming each other and foreigners for our own past mistakes.

  3. History has proven you correct. The trade deficit is at an all time high due to the high cost of oil prices. The last thing we need is higher prices for imported Chinese goods.

  4. We need a stronger strategic and economic alliance with China.

  5. In this coming election, just watch the Republicans use China as a scapegoat to attack Obama. You are right. China is doing nothing hostile to the USA or USA's interests.