OP-ED: World Out of Balance, By PAUL KRUGMAN, New York Times, November 15, 2009
The gap between China's responsibilities and its actions are the missing link in global stability right now.
The guts:
Some background: Most of the world's major currencies "float" against one another. That is, their relative values move up or down depending on market forces. That doesn't necessarily mean that governments pursue pure hands-off policies: countries sometimes limit capital outflows when there's a run on their currency (as Iceland did last year) or take steps to discourage hot-money inflows when they fear that speculators love their economies not wisely but too well (which is what Brazil is doing right now). But these days most nations try to keep the value of their currency in line with long-term economic fundamentals.
China is the great exception. Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy -- forces that should have strengthened the renminbi, China's currency -- Chinese authorities have kept that currency persistently weak. They've done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities.
And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.
What makes China's currency policy especially problematic is the depressed state of the world economy. Cheap money and fiscal stimulus seem to have averted a second Great Depression. But policy makers haven't been able to generate enough spending, public or private, to make progress against mass unemployment. And China's weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.
Krugman continues to sound this alarm, but . . .
Unfortunately, the Chinese don't seem to get it: rather than face up to the need to change their currency policy, they've taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits -- that is, to make our unemployment problem even worse.
The pressure grows for the Chinese to step up and stop free riding on economics--in addition to security.