Until a couple of weeks ago, China appeared isolated in its denial that it was manipulating the value of its currency to give its exports a competitive advantage in world markets. Then, following an announcement by the Federal Reserve Bank of the United States, it was the United States that appeared isolated in denial of an almost identical complaint, but with even more of the world’s leaders outspoken about it. Derived from the Latin word for “hand,” “manipulate” suggests hands-on activities directed toward specific outcomes, and much of the world seems to have concluded that both China and the United States are guilty of currency manipulation.
Manipulate: v.t. Handle, treat, esp. with skill by dextrous (esp. unfair) use of influence, etc. (The Concise Oxford Dictionary); to manage or control artfully or by shrewd use of influence, often in an unfair or fraudulent way (Webster’s New World Dictionary).
On the eve of the G-20 summit in Seoul, the decision of the Federal Reserve Bank of the United States to engage in $600 billion worth of “Quantitative Easing” (being called “QE-2,”) unleashed a torrent of criticism, mostly from China, Germany, Brazil, and Japan, but also from the Republican Party and even fiscal conservative Democrats in the United States. The announcement came not long after the U.S. House of Representatives passed a bill attacking China’s management of its currency (not likely to be approved in the Senate) and while U.S. Treasury Secretary Timothy Geithner was trying to broker an international agreement that would avert mutually assured destruction by currency devaluation among the world’s leading economic powers. The Federal Reserve Bank, by law and practice, acts independently of the Administration, but President Obama rushed publicly to the Bank’s defense with a letter to his G-20 partners, effectively endorsing the Bank’s plan.
By the dictionary definitions of “manipulate,” neither China nor the United States could be held accountable for currency manipulation. Neither one has been particularly shrewd or artful in their monetary management. China has tied its currency valuation to the dollar and has let it rise and fall accordingly. The United States has managed its money supply, entirely aware of the basic rules of supply and demand and their impact on price (or, for currency, valuation). QE-2 will add 600 billion dollars, although technically not into circulation, “easing” the quantity of available cash or at least credit. Had the value of the U.S. dollar been rising since September 2008, China might have been guilty of a serious miscalculation, but not of manipulation. Yet, had the dollar’s value been rising, there could have been even more reason at the Federal Reserve to dilute it.
The American interpretation of China’s actions, perhaps not incorrect, is that China has wanted its currency to fall in value in order to support the export-driven economy. For all that China has articulated what the United States has wanted to hear – that it would rebalance its economy by encouraging domestic consumption and reducing dependence on exports – the effective devaluation of its currency has made it more expensive for Chinese to purchase foreign goods while Chinese exports remain cheap in foreign markets.
For the United States, quantitative easing means priming the economic pump: more money ought to make more credit available, encouraging Americans to spend and invest. The intent, most economists agree, is not to weaken the dollar, but no one can deny the consequence, a 7 percent drop against the euro between the first hint of such a policy in late August and the announcement in November.
Both China and the United States, then, deny that their respective policies are for the purpose of weakening their currencies and enhancing the affordability of their exports. Yet, the actions of both – tying the renminbi (“RMB” or “yuan”) to the dollar while the dollar’s weakening is enhanced by the Federal Reserve Bank’s quantitative easing – have the same consequences and are interpreted by other countries the same way. The game becomes zero-sum: a weaker dollar, or a weaker yuan, has to mean a stronger something else and, in most instances, a stronger everything else. For Brazil and India and Korea and Japan and Germany, it means less competitive exports at the crucial time when everyone would like to export their way out of recession.
China is not alone in tying its currency to the dollar. Some countries, such as Ecuador, use the dollar as their currency and have no currency of their own. The American objection (supported until November 7 by most of the world’s leading economies) has been that China’s export-driven recovery, outstripping the United States and Europe, especially, has been enabled by a sinking in value of the RMB at the very time that market forces would have had it rise. However, had the American recovery been more robust, the dollar might have been rising instead of sinking and the Chinese currency would have been rising with it. Alternatively, had an underpriced Chinese currency not been in play to aid Chinese recovery, perhaps the Chinese recovery would have been less impressive. China argues that the whole world has benefited from its swift recovery, and most economists agree. But most economists agree, too, that a global recovery led by China without the United States is not a durable global recovery.
The underlying complaint, then, is that when the global financial system failed, China acted quickly and fully to sustain its economy while most other countries, especially the United States and the European Union, hesitated before, in instances such as Greece, maybe Ireland, being lost. Many economists, such as Paul Krugman, are convinced that the resources committed by the United States for economic recovery were a mere fraction of what were needed, enough to keep the economy on life support, but not enough to create jobs, restore credit, and secure financial institutions.
Even as Krugman leads the complaints about China, his indictment of American policy in the financial crisis implies an acquittal. Had the United States done what Krugman recommended (above all, a much bigger infusion of capital, but also nationalization of the banks), Krugman probably would have to admit that the United States would have been attracting investment, American corporations would be investing, the dollar would be worth more, and so, as night follows day, would the RMB. Alternatively, had the United States followed Krugman’s advice and it did not work, Krugman would have had to look elsewhere for an explanation. Hence, China’s conduct has been disturbing to the United States (and Europe, Korea and Japan) only because China recovered substantially while the United States did not, in significant measure because China did what Krugman recommended (especially in massive government investment), while the United States did not. The American failure was not initially caused by Chinese conduct, although there may be a causal link to the contrast between Chinese and American economic trajectories following the opening bells.
Nothing could have undone President Obama’s position during his trip to Asia more than the Federal Reserve Bank’s announcement of QE2. Some think the timing of the announcement was too uncanny to have been uncoordinated between the White House and the Federal Reserve, especially given the swift presidential endorsement. Others, however, surmise that the independence of the Federal Reserve has not been compromised. Regardless, President Obama defended the Bank’s action as being good for the U.S. economy and therefore necessarily good for the world. However much world leaders might agree that U.S. economic recovery is good for everyone, and that QE2 may be driven much more by domestic necessity than by competitive advantage in exports, they nonetheless interpreted the development and its timing as hypocritical: China has defended its disinclination to revalue currency in almost identical terms, that China’s policy is good for China and China’s economic stability is good for the world. Contrary to Adam Smith, when everyone acts out of their own self-interest, the common good does not necessarily emerge.