Friday, July 22, 2005

KRUGMAN GETS SOME THINGS WRONG

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By Elaine Meinel Supkis

Often I admire Mr. Krugman. I read him avidly and learn a lot from him. But sometimes he misses what is going on. I assume this is because he reads the New York Times when it comes to stuff about China. He obviously doesn't read Japanese or Chinese newspapers.

I have read both for many years. Most of my life. So I have a great "reserve" of past information. This is why I say some of the weird sounding things here: most people have paid attention to Asian currency games only recently. Since my family has bought and sold Asian currencies for sixty years, traveling in and out of the place, we have a long, family/institutional memory concerning these currencies.

Did you know, you couldn't take India's currency out of the country for many years? No? Well, trust me, whenever my parents left the country, they would visit a nearby market and go on a spending spree and donate whatever was left to a charity there.

They went to China when there really wasn't a currency at all, during the Cultural Revolution.

They went in and out of Japan and marveled how you can buy Japanese goods much cheaper out of Japan than at home. So they bought nearly nothing there.

The Japanese aggressively manipulate their currency. They are masters of this.

From the NYT:
(Krugman) Thursday's statement from the People's Bank of China, announcing that the yuan is no longer pegged to the dollar, was terse and uninformative - you might say inscrutable. There's a good chance that this is simply a piece of theater designed to buy a few months' respite from protectionist pressures in the U.S. Congress.
Wrong. It is not theater. They kept parity with the dollar until they got all their internal systems ready and signed all the treaties they needed to secure their borders and extend their trade. The last treaty signing of significance was two days ago with Spain and Vietnam.

The new system is hidden from view and controlled by some very astute people who happen to be in the top ranks of the ruling communist party. They share the same goals as the others and will work in harmony with them. This isn't some independent entity that will be deciding on a daily basis what the currency will be vis a vis all others.

It will change, in concert with the diplomatic and economic desires of the collective, this is a communist nation that has achieved a great thing: no despots but rule by consensus and committee.

Krugman follows a false history at this point in his article:
A decade ago, before the world financial crisis of 1997-1998, capital movements seemed to fit the historic pattern, as funds flowed from Japan and Western nations to "emerging markets" in Asia and Latin America. But these days things are running in reverse: capital is flowing out of emerging markets, especially China, and into the United States.

This uphill flow isn't the result of private-sector decisions; it's the result of official policy. To keep China's currency from rising, the Chinese government has been buying up huge quantities of dollars and investing the proceeds in U.S. bonds.
Japan, the master manipulators of currency bar none, after being dragged to the Bretton Woods II accords, reset their currency to around 100 yen to the dollar. They then promised to "float" it only the Daisy Mae keeping it afloat has a very serious leak and it never rises above a certain point. If the yen rises so 90 yen buys a dollar, they take action and sink it.

The American rulers figured this game out and played it from day one, namely, when Bush Sr. was President and needed war money and couldn't read his lips, no new taxes. Even with the feeble stab at balancing the budget by raising taxes did virtually no good but Bush found he could get the Japanese to buy our public debts and in exchange, they could sink the yen to a level to keep Japanese goods much cheaper in America than Japan!

Whoopee. They then began the ruthless decimation our our industry in ernest.

The Chinese watched this and learned.When they got enough money going, they began to buy our debt and keep the currencies hooked together.
Some economists think there is a deep rationale for this seemingly perverse policy. I think it's something the Chinese government stumbled into as it tried to protect itself from the 1997-1998 crisis, and it is reluctant to change because the Chinese economy has been doing well. That is, China's leaders don't want to mess with success.

But pressures against China's dollar purchases are building. By keeping the yuan down, China is feeding a trade surplus that is creating a growing political backlash in America and Europe. And China, which is still a poor country, is devoting a lot of resources to the accumulation of a basically useless pile of dollars instead of to higher living standards.
Always, American pundits underestimate and misunderstand our opponents, looking down on them. If anyone thinks the Chinese "stumbled" upon their past policies, they are nuts. The policy isn't "preverse". It is working just fine. The American government is now addicted to China buying our debts. Proof is that we went debt slap happy the minute they offered to bankroll our wild spending. They smiled and signed the loan papers and we went out and started wars.

They track the amount due and rub their hands with happy glee. This money isn't doing anything for China except buying America. If we go bankrupt, China doesn't care so long as we lose all the money owed to the Japanese at the same time. See?

Japan has twice as much invested and will lose twice as much if America goes bankrupt. This is called "killing two enemies with one stone." See? Stunning.
This story is still in its early days. On the first day of the new policy, the yuan rose only 2 percent, not enough to make any noticeable difference. But one of these days Chinese dollar purchases will trail off, and we'll find ourselves living in interesting times.
Little effect? This rate change, a trivial, tiny thing, had way outsized effects already. The Chinese have noted this with great glee. They know this means the yuan is a "pressure point" much more than the sneakier, more hidden yen effect.

This means they can move world markets up or down with impunity on their own agenda. I hope your hair is standing on end. It better.

Greenspan loved the idea that the world trembled at his tread. It does no longer, indeed, he has openly expressed amazement that rates don't change on his say so, the bond market no longer runs the minute he orders them, someone else gets this response.

That person speaks Mandarin.

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