Matt Yglesias is moderately supportive of legislation Harry Reid is championing to crack down on China’s currency practices. “Threatening the Chinese government with trade penalties if they don’t alter the dollar-yuan exchange rate is a mighty clumsy alternative to doing monetary stimulus,” he writes, “but it’s something Congress has authority over and it’s something there’s some GOP support for. Meanwhile, since voters are strongly nationalistic and strongly confused, they think a ‘strong dollar’ is good but that ‘Chinese currency manipulation’ is bad, even though the point of Chinese currency manipulation is to make the dollar strong. I say thumbs up.”
I haven’t read the legislation closely enough to comment on it specifically, but I just had an interesting conversation with economist Carmen Reinhart (of “Reinhart-Rogoff” fame) that speaks to this question a bit.
“Bernanke has said the reason we expect more recovery than in past crises is we’ve done more monetary stimulus. And de jure, we have done more on the monetary side. Much more. But de facto matters a lot. In some of those countries, when the crisis hit, there was a big depreciation in the value of the currency, and that’s a very big stimulus factor. We didn’t get that. We had a dollar appreciation, and that goes the wrong way for the recovery.”
To put this a bit more plainly, most countries that suffer big financial crises see the value of their currency fall. That makes their exports cheaper, and helps them recover. For reasons related to the safety of Treasury bonds and trade strategies by countries like China, our currency gained value during the crisis.
People like the sound of that, because ”gaining value” and being “strong” are, in most cases, good things. But if you’re a business and your customers stop coming in, you don’t want to raise your prices. Yet that’s essentially what we did, or at least what was done to us.
Related: If you’re confused by all this talk of strong and weak dollars and currency depreciation and appreciation, read this piece.
