Joseph Stiglitz: Is Mercantilism Doomed to Fail? And With It the US Dollar?

This is Joe Stiglitz' presentation at the INET conference in Berlin last week. He speaks about mercantilism, and I added the tagline about the dollar.

The one point I wish to make emphatically is that only under a fiat currency trade system can these large deficits and surpluses be created, in the same manner as the debt bubbles, and asset bubbles.

This is not a new idea, of the natural balance that hard currencies present in a global trading system. But it has been forgotten, put aside in recent years. My friend Hugo Salinas-Price has written a nice presentation of those ideas in his essay Gold Standard: Protector and Generator of Jobs.

I have written on the topic many times, most recent in The Great Flaw In Free Trade Theory and other Vain Beliefs, Hoaxes, and Follies.

Under a hard currency or asset system of trade, as one country draws down its stock of gold, for example, its gold-backed currency would automatically become devalued since there would be less gold underpinning it.

Conversely, as a country built up a trade surplus, over time so much gold would flow to that country so that its currency would appreciate relative to the currencies of the debtor nations.

These changes in valuation would tend to 'balance' the trade flows naturally, and unilateral mercantilism would fail long before it threatened the stability of the international monetary system.  That is not to say that exploitative trade might not exist, such as under the British Empire.  These took more of a form of colonialism, a kind of mercantilism among master and vassals.  But any trade imbalances between developed nations with their own currencies could only grow large with great difficulty.

A fiat currency regime allows huge imbalances not only to exist, but to grow to dangerous and unsustainable levels that threaten the very system itself.

Some of today's problems are indeed because the US is acting as the 'deficit of last resort' because it owns the world's reserve currency. This is known as Triffin's dilemma.

My thoughts about Triffin's Dilemma and the international trade structure  that as a businessman I was operating within during the 1990's, especially after Bill Clinton allowed China to obtain free trade status after a large currency devaluation and without a floating currency stipulation, was that ultimately the world would be plunged into a currency war that would likely either lead to a unified financial order, possibly a triumvirate of spheres of influence, or the failure of the dollar and a radical restructuring of the global financial power structure.

So far we seem to be on track.

The Great Flaw in the Free Trade Theory And Other Vain Beliefs, Hoaxes, and Follies

There are several economic models and political memes that rely on an underlying belief in the natural efficiency and goodness of 'free trade' and 'efficient markets.' One can question whether these ideas promoted certain behaviours, or if certain parties promoted these theories to serve as justification for their policy objectives.

Whatever the case may be, let's take a look at the theories that seem to underpin the virtue of 'free trade,' meaning international commerce with very light national regulations and a centralized semi-autonomous authority as arbiter.

One of the theories in favor of free trade is the idea of comparative advantage, that is, that one country might have a natural advantage which they can exploit for their own benefit and the general benefit of the world. I am sure we all learned this in business school. I myself was quite a fan of Michael Porter in my day.

This theory is a universalisation of the idea that the naturally gifted pottery maker, for example, has an inherent talent that can be exploited, and can create and exchange pots for food, let's say, from a farmer who has the advantage of owning suitable farm land and has the talent and tools to exploit it.

Makes common sense does it?   Everyone does what they do best, and through the free exchange of  products the aggregate good is increased.  A nice simplistic maxim that underpins a broad economic and social philosophy, such as 'from each according to their abilities and to each according to their needs.'

The fallacy that is repeated over and over by the non-scientific thinker (like too many economists and politicians for example) who use these simple examples and sayings is that one can extend things that might make sense anecdotally into general, almost universal principles writ large on the face real world, or more properly OVER the face of the real world, that at the end have little real fundamental connection with reality and the expected outcomes.

This was Mandelbrot's great criticism of the neo-liberal school of economics, notably the Chicago School, for example. Their broad assumptions crushed the reality out of the math, and the application of their theory made the markets inherently unstable by miscalculating the risks which were allowed to grow to enormous levels, and then crash at the under-expected event, colloquially known as 'a black swan.'

There is some validity to this. Some nations, for example, are blessed with great natural resources such as coal and oil, and they can sell these items to other countries and regions in exchange for items like food, for example.

But like most efficiency arguments, most notably the efficient market hypothesis, these ripples in distribution or market anomalies are quickly exhausted, and in the classic impetus and peril of successful capitalism, the player start to create monopolies and other artificial advantages, such as frauds, which they can exploit more fully.

So for example, a nation such as China can devalue its currency substantially in the 1990's against the world's reserve currency, and thereby set up a set of artificial import barriers and export subsidies, simply by manipulating their currency.

By the way, this is basic math. There are plenty of people who were denying it, and most of them stood to benefit from this charade. But it is true. Anyone who travels internationally and changes money understands it.

The underlying basis of the currency wars is the ability to artificially manipulate one's currency, or even establish a pseudo-monopoly, for the advantage of one to the disadvantage of the others.

There are other methods to accomplish this and they are usually lumped under the title of industrial policy or mercantilism. A country has a set of laws and regulations that foster a certain stance towards issues such as worker's rights, environmentalism, savings and consumption, wealth distribution and even human rights.

The more trade becomes independent of public policy and regulation, the greater the movement of all countries to the least common denominator of the broader policy stances of the mercantilist nations.

In a very real sense, if you control the issuance and terms of money, you care not who makes the laws locally. And the exchange of trade mechanism is a subset of the control of a medium of exchange, which is the trade system, both international and domestic, the who and how people can buy or sell.

This principle seems to be the basis of the inclusion of gold and silver in the money system series of essays written by my friend Hugo Salinas-Price, and the age old understanding of the balancing mechanism of a harder and higher standard of exchange to manage the tendencies of various participants manipulate the rules, and to 'cheat.'

Anyone who believes that believes that markets and society do not require clear laws and impartial referees because people are naturally inclined to know and do the 'right thing' has obviously never driven on a modern American freeway.

If, for example, we were in a gold standard system for international trade, and the governance had allowed China and its multinational capitalist friends to game the system as they are doing now, eventually the flow of gold from the US to China would compel the US to devalue its currency against the Yuan, and thereby persuade China to release more of its reserves as gold back into the system by purchasing other things. If they used it to buy US debt for example, the dollar would continue to devalue in a cycle which would hamper and ultimately defeat the currency mercantilism.

It would have also restrained the US from manipulating the world by 'owning' the world's reserve currency and the 'exorbitant privilege' therein. It would have curtailed unfunded wars, and the exporting of jobs and production in favor of a 'service economy' that consists largely of pushing the reserve currency around the plate, and skimming the greatest portion for an elite group of policy leaders.  No standard is perfect, and there are ways to subvert some external standard like gold, but it is more difficult to do, and it is more easily seen and exposed if the standard is resolute and robust.

We see a similar principle in action in the theory supporting efficient markets. On paper they sound good, but they are deeply flawed because of the nature of the assumptions they make about people and their rationality and selflessness.

As most gardeners can tell you, there is rarely such a thing as a naturally beautiful and weed free garden, especially the ones that look 'natural.' It takes a great deal of forethought, adjustment, and continual work to make anything sustainable in this world of ours. And so it is with markets, both local and international.

There are those, like former Fed Chairman Greenspan, who argue that the fiat regime of the Federal Reserve works if the Fed 'acts like a gold standard,' that is, with an unapproachable virtue.  A similar theory underpins the World Trade Organization's function in international trade.  But like all human systems, they tend to fall to the great truth observed by Lord Action some years ago, that "where you have the concentration of power in a few hands, all too frequently men with the mentality of gangsters get control. History has proven that."

I am not promoting a gold standard per se and understand the problems inherent with it, and do not wish to discuss that here.

But what I am attempting to do is expose some of the fallacies of the zombie economic theories that have led the world to the place where it is today, with too much discretionary power concentrated in too few hands, with a propensity to act in secret and with an excess of latitude behind the cover of those artificial constructs known as 'corporations.'

This notion that government and regulation is the problem is true only to the extent that government has become weakened and corrupted by gross abuses. Effective government takes planning, continual hard work, and the adjustment of renewal and reform.

Human constructs, if not continually managed and repaired and occasionally renewed, tend inevitably into disruption, dysfunctionality, and corruption.

To say, let's just get rid of it and things will somehow become naturally good is to attempt to build a castle in the clouds. It will not and has never worked to promote a harmonious and productive society on a large scale, ever, in all of human history. It is the law of the jungle. But it has its continual appeal to sociopaths, misfits, the naive, the frustrated, and psychopaths. 

It is a tool of the false dialectic of extremes, that argues that the choice is between no government and bad government, and that if government is not perfect it is inherently evil.  Because they are driven to extremes, those who argue this cannot see the great middle ground, of an imperfect government that nevertheless is capable of maintaining justice and order within the context of freedom.   Failure is only certain at the extremes, of authoritarianism and anarchy, when by two different paths one turns society over to the wolves.

The longer this artificial construct of natural goodness and perfect rationality is maintained, the greater the forces against it will build, until countries and nations explode into revolution and wars, as a consequence of folly. 

The model in my forecast says that meaningful reform to the status quo will not be readily accepted by the power elite  They will promote a 'new normal' which will span a leisurely 'five to ten years' for economic recovery, while they are comfortably standing above it all on other people's necks.  The ability to set oneself aside and apart, as separate and above, from the rest of humanity is served in many ways and by many things. It is a dangerous delusion to feel naturally privileged for whatever reason. It can only be maintained through power, and power is a deadly narcotic.

We can be thankful that other crackpot theories have not become mainstream, such as eugenics, or the marginalizing and then disposal of the weak, the disabled, and the different to serve the economic advancement of the state. Or groupthink, and profound belief in national or racial exceptionalism that tends to lead groups to quick utilitarian solutions and Pyrrhic ends. So there is some room for optimism.

Change may not come until the powerful are standing in ashes, and therein lies a tragedy yet to unfold. Let us work on with hope that reform comes well before then.

Financial Times
Swiss central bank considers euro peg
By Peter Garnham

The Swiss National Bank, which has been waging battle to rein in the strength of the currency, has left open the possibility of pegging the Swiss franc to the beleaguered euro.

Thomas Jordan, vice-president of the SNB, said a temporary franc peg with the euro was within the range of options that policymakers might use to stem the Swiss franc’s strength. “Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability,” he said.

Mr Jordan added that the central bank could employ other tactics, however, raising speculation that the central bank could impose penalty rates on non-resident franc deposits for the first time since the 1970s.

“We still have, at the moment, possibilities to make monetary policy more expansive without intervening in the Swiss franc,” he said.

The comments came after the SNB launched a fresh assault on what it has described as a “massively overvalued” franc on Wednesday by flooding the Swiss money market with liquidity to meet demand for the currency. The Swiss franc pulled back from record highs on Thursday after the bank’s latest action.

The Swiss franc has been driven higher in recent weeks as investors have sought a haven from concerns over eurozone and US government debt and worries over global growth...

The World Is Waiting For The Sunrise: A Practical Guide to the Re-Monetization of Silver

Here is an excerpt from a longer discussion presented by my friend Hugo Salinas-Price in London today.

Although the proper title of the presentation is 'A Discussion of Precious Metals As Money,' I tend to call it 'A Practical Guide and Rationale For The Re-Monetization of Silver.' You can read the presentation here. I present an important excerpt, part III, below.

For my own part, I do not favor a return to a formal gold or silver standard at this time. I do not prefer it because I do not wish the developed and dominant nations to monopolize and formally set the price of these metals as they have been doing informally, given the unstable, opaque, and dare I say conflicted, nature of their financial systems. Any monetary system requires some measure of transparency and honesty and these are sadly lacking in the modern financial system.

Rather, I think it would serve the purpose to have a trusted coin available with the sanction of the State, at a floating price, to serve in parallel with whatever fiat currency regimes that may be locally in place. 

Thus one could call it the re-monetization of silver, but not the imposition of a formal gold or silver standard. This has two striking benefits: the flexibility to informally devalue or strengthen the national fiat currency, with a sound and safe way to store individual wealth and promote savings and the accumulation of capital for productive investments.  A progressive country might even treat the gain (or loss) of the bullion coin's value as a non-taxable item, providing some remedy to the people if the central bank indulges in printing money and quantitative easing.

This is similar to that which we have today, except that the coin would provide a reliable and practical means of obtaining and storing wealth for the individual, far superior to the ad hoc system of precious metals ownership in place today that is greatly abused by naked short selling and paper leverage, the same taint of the banks which has devastated the global financial system. 

I would look for keen opposition to this by the Anglo-American banking cartel and their friends in central government, since this proposal is inimical to the domination of others through the absolute control of a paper money system and the process of confiscating wealth in the form of inflation, fees, and frauds.  However, I think the zenith of their power is already passing, and because of their foolish and reckless excesses the tide history is about to roll over them.  Most of those close to the system will never even see it coming. Such is the way of long cycle changes.

I believe this proposal offers a unique opportunity to whatever country first steps forward to take it, and provide a universally acceptable metal coin with a floating value that can be used for public and private transactions in their country, as well as private transactions in other regions of the world. After all, one of the primary currencies in young America was the Spanish Dollar, the silver eight reales coin, the source of the phrase, 'pieces of eight.'

With the inclusion of modern technology to promote confidence and inhibit counterfeiting with some elementary testing equipment, some fortunate country could establish itself as the first nation to introduce a hard alternative currency for itself and for the world, in the face of a failing post-Bretton Woods monetary system, to the benefit of their people.

I do not expect the US or the UK to be this innovator, and in fact to stubbornly resist it for the reason cited above. Rather it is more likely to be some emerging economic power such as Mexico, India, Venezuela, Russia or China.  Or perhaps even a confederation of countries or US states acting for the benefit of their people in the face of the powerful banking lobby centered in Washington and New York.

I see this as important now because of an abiding belief that the US dollar reserve currency and international trading regime is highly unstable and too likely to collapse because of a loss of confidence under the weight of pernicious financial corruption. Obama's failure to reform has sealed its fate, and I think we are beyond the point of no return.

I also see great peril in the west with regard to the principle of the private ownership of property, a deficiency created by the very banking system that rose to power on the canard of deregulation and free markets, which has been used as a guise by which to plunder the wealth of the nation. The large scale seizure of property through a highly questionable and fraudulently based foreclosure process may be a portent of things to come. Savings held as electronic digits are much easier to control, debase, defraud, and devalue. 

And I think confidence in the financial markets and assets are at all time lows among the people, despite the aggressive public relations campaign to the contrary being conducted by the bankers and their demimonde in the corporations, central banks, and central governments.

Thus there is an obvious need for a store of wealth that is universal, liquid, portable, and not as subject to the whims of the shadow banking system and the financial plutocracy.  This could happen in the existing system if naked shorting were banned and the regulators would perform their sworn duties to the people, but that appears to be unlikely, and all too easily corruptible. A

Alan Greenspan has said that to the extent that a fiat currency and credit system acts with measured restraint, 'acts like gold,' it can be sustained with an orderly growth and stable prices. And if all good boys and girls act with perfect rational honesty and lack of overly selfish interest and misbehaviour, markets will be naturally efficient and require no regulation.

That is the very point of this. They have not, they do not, and they can not do so in the future, because of the tendency towards corruptibility that a pure fiat system offers to the politicians, insiders, and financial engineers. Abuse of power, as in a dictatorship, is maintained only to the extent that they can extinguish and suppress the alternatives, and even the knowledge that other choices exist. The strength of a broad democracy lies in transparency and relatively independent alternatives, a refuge if you will from the vagaries of human error and venality.

So a convenient and widespread bullion coin appears to be a good alternative. Admittedly it would not be a panacea. There are none. Every system requires work. But some systems are easier to maintain, more robust, less susceptible to failure, and just better than others.

The question in my mind is not so much 'will it happen?' as it is 'who will be the first?' To me it would be the ultimate irony if such a move to promote economic freedom came from a non-Western country.

The World is indeed in the winter of its financial discontent, and 'waiting for the sunrise.'

The World Is Waiting For The Sunrise:
Part III of a four part presentation
By Hugo Salinas-Price
The Cheviot Sound Money Conference
Guildhall, London, England
27 January 2011

Since ancient times one of the most important activities which any State exclusively reserved to itself was the minting of the nation’s money.  In our age we have seen that modern banking systems have completely usurped this fundamental function of the State. Had the banking systems of the world fulfilled this function correctly, we should not be pondering monetary matters.

The fact is that the banking systems of the world have one and all followed the same banking rule book, which they altered when the rules proved an impediment to increased profits, and they have managed to expand themselves into total bankruptcy. Not only that, but having taken over the power of issuing money – of zero quality – they have arrogated unto themselves as if by a natural, God-given right the function of being the central promoters of growth and prosperity.

Thus have the money-lenders promoted themselves into a ruling plutocracy. We are now witnessing the inevitable downfall of these plutocracies which have not been interested in the welfare of their nations, but first, second and last in their own enrichment and power. Thus the plutocrats have bankrupted themselves out of greed and irresponsibility.

We have shown how the Treasury of the UK can have a silver coin minted, and how it can endow that coin with a monetary value. Please notice that we are not assigning this task to the Bank of England. The Bank of England is a Central Bank, a financial institution which regulates banking in the UK. Among other responsibilities, it is in charge of monetary policy, which means that the creation, maintenance and increase or decrease in the amount of fiat money circulating in the UK is within its authorized sphere of action.

The historic development of banking all over the world has led to the present situation, where all money is the exclusive preserve of banking systems and their Central Banks and where, in fact, there is only one kind of money in the world, fiat money.

We live in a world where the dominant paradigm is fiat money issued exclusively by a Central Bank and its related banking system. Humanity today knows of no other money but this!

If and when the Treasury of the UK, in obedience to the instructions of Parliament, proceeds to the minting of a one-ounce pure silver coin with no engraved value and issues a monetary quote for that coin, this will be a revolutionary event from the point of view of the bankers.

The prevailing paradigm of fiat money, and only fiat money, issued exclusively by the Central Bank and its related banking system will have been broken! The State, through the Treasury, will be creating true money.

This will be permanent money which will remain in circulation until it is so worn out that it has to be replaced, at Treasury expense, with new coinage; money that will never be at risk of disappearing due to a collapse of the banking system. Banking, the business of lending money, is a legitimate business subject to risks which all businesses must run. However, the creation of money is not and cannot be a legitimate function of banking: there is a conflict of interest involved in the union of the two functions. The present worldwide monetary and financial disarray is evident proof of this statement.

The rupture of a paradigm is a rare event; entrenched ideas are hard to dislodge. A fresh approach leads to new avenues of action and opens up new horizons which can resolve the total dead-end confronting the world. The system of fiat money issued by banking systems has exhausted itself and cannot offer real alternatives to progress, but only such aberrations as QE 2.

The first thing that will happen when the prevailing monetary paradigm is broken is that people will immediately begin to regard money in a different light: they will have an option, where there was previously no option at all. Britain would no doubt receive the monetization of a silver coin most enthusiastically. The demand for the coin would be enormous.

If the bankers are allowed to have their way, there will be no monetized silver coin. They will adamantly oppose it. They will be frightened to death of the preference which the British would surely give to the silver coin. They will allege that if the silver coin becomes a reality, Britain is doomed. The bankers are prisoners of their paradigm and can think in no other terms.

No one can foresee all the consequences of introducing a silver coin into circulation in parallel with paper and digital money. Churchill once said, “In politics, experimentation is revolution.” However, real silver money has been the rule in history, not the exception; thus a partial return to silver money as an option alongside paper and digital money is hardly an innovation or experimentation. In historic terms, what has been experimentation – and QE 2 is avowedly experimentation – has been global fiat money created by bankers who quite evidently have had no notion of what they were doing and did not know or did not care what the consequences of their actions would be. The British would experience the joy of holding real money in their hands and saving money that will surely be worth something in the years to come: money that cannot be devalued. Revolution, for the bankers who have not lived up to the trust placed in them; for the people, it heralds peace of mind and hope for a better future, not revolution.

Should not a proposition which offers something sure to be welcomed unquestioningly by hundreds of millions of individuals all over the world be worth considering, notwithstanding the objections of the bankrupt bankers? The deep-seated dread on the part of the bankers regarding the latent preference for silver (and gold) on the part of the population reveals a fundamental social instability which will have to be addressed at some point.

Politics implies tensions between sets of ideas. At some times, ideas that further social progress, prosperity and good husbandry are paramount; at other times, the prevailing ideas impede prosperity, breed apathy and promote profligacy.

There is now a potential tension between two conflicting ideas: the idea of the Welfare State, which is tottering on to its eventual collapse, and the idea of taking one’s welfare back into one’s own hands, which at present revolves around an unexpressed mute desire for savings of real, tangible money such as monetized silver. The monetization of a silver coin would provide a channel for that potential tension and create an enormous tide of savings in silver coins.

We believe that the undoubted desire of all peoples of the West - and of the East, as well - is to enjoy real money as the foundation of their economic efforts, and that this desire has been unexpressed and mute because no one has proposed a means of satisfying it. Silver money, which has ever been the money of the people, can become a reality that comes to life in parallel with the prevailing fiat money. Its further development and growth in importance can be only dimly sketched, but it comes to life pregnant with possibilities.

The creation of a silver coin with a stable monetary value, which can remain in permanent circulation in parallel with paper and digital money, would finally close the circuit that turns a worldwide desire into an actuality. The surge into silver money would be enormous. Should we fear what the people desire, or should we understand that desire and its justification, and open the way for it to express itself?

We also believe that the monetization of a silver coin by the method we have outlined – its various details are suggested but can be altered to suit – can become the irresistible objective of a political party that wishes to come to power; there is a silent desire for real money on the part of all people of the world and - the world is waiting for the sunrise!

The Marriage of Mercantilism and Corporatism: When Free Trade Is Not 'Free'

"The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different." Paul Krugman

And he is exactly right. As regular readers know this matter of Chinese mercantilism and its toleration and acceptance by the West has been a key observation and objection here since 2000. Any economist who does not understand that devaluing and then maintaining an artificially low currency peg with a trading partner distorts the nature of that trade should review their knowledge of algebra.

Sophisticated oligarchs do not need to send real tanks against their people. They can accomplish the same objectives using fraud, debt, and corruption. Control the supply of money and care not who makes the laws. But it helps to have the lawmakers and regulators on the payroll.

It was in 1994 during the Clinton Administration that China was permitted to obtain full trading partner "Most Favored Nation" status, while vaguely promising to float their recently devalued currency some day, and address the human rights issues that were endogenous to their non-democratic, totalitarian government.

"From 1981 to 1993 there were six major devaluations in China. Their amounts ranged from 9.6 percent to 44.9 percent, and the official exchange rate went from 2.8 yuan per U.S. dollar to 5.32 yuan per U.S. dollar. On January 1, 1994, China unified the two-tier exchange rates by devaluing the official rate to the prevailing swap rate of 8.7 yuan per U.S. dollar." Sonia Wong, China's Export Growth

This served Mr. Clinton's constituents in Bentonville quite well, and has some interesting implications for the Chinese campaign contributions scandals. It supported the Rubin doctrine of a 'strong dollar' while facilitating the financialization of the US economy and the continuing decline of the middle class wage earners, under pressure to surrender a standard of living achieved at great cost. "How I Learned to Stop Worrying and Love the Currency Collapse." and China's Mercantilism: Selling Them the Rope

Not to limit this, George W. ratified the arrangement when he took office, and so it has gone on for almost fifteen years now, with China 'taxing imports while subsidizing exports' to the disadvantage of its western trading partners.

I expect certain economists who are serving their Chinese clients to make their case to muddy the waters, since this is what they are paid to do. But the silence of the many in this matter was so striking as to be incredible, almost mind boggling. But given the acquiescence of the many in the face of equally absurd theories such as the impossibility of a national housing bubble or pervasive market fraud in naturally efficient markets, we should not be surprised.

Even now someone as knowledgeable as Mr. Krugman can distinguish the inappropriateness of the Chinese unfair trade practice "in current environment" through currency manipulation with prior periods, as if it was all right back then, but somehow is no longer acceptable because of the current economic slump. How can one argue with a straight face that a currency peg that continues for years is not inherently unfair, and a contributing factor to economic imbalances, given the assumption that it imposes a de facto subsidy for exports and penalty for imports?

This is not a trivial distinction but tied to a generational assault on the US middle class. Class Warfare and the Decline of the West.

Perhaps it is a good time to reconsider the principle of the 'neutrality of money' with respect to exchange rates controls and global trade in a purely fiat reserve currency regime as was done with the 'efficient markets hypothesis.' Currency Manipulation and World Trade: A Caution. China is certainly standing western capitalism on its ear and giving it a spin. But this is not without historical precedent, and was predicted by V.I. Lenin himself. I would enjoy this spectacle perhaps if I were observing it from a distance in time.

In a global trade environment tied to external standards such as gold or silver, such egregious imbalances could not grow so large because the metals would impose a certain market discipline requiring a reconciliation and adjustment before monetary excesses became a potentially systemic catastrophe as pointed out so skillfully by Hugo Salinas-Price in Gold Standard: Protector and Generator of Jobs.

The policy errors of the Greenspan and Bernanke Fed, and the outrageously unrealistic if not romantic and utopian theories promulgated by economists about self-correcting markets make me, to borrow a phrase, want to 'bang my head against a wall.'

NYT
China, Japan, America
By Paul Krugman
September 12, 2010

Last week Japan’s minister of finance declared that he and his colleagues wanted a discussion with China about the latter’s purchases of Japanese bonds, to “examine its intention” — diplomat-speak for “Stop it right now.” The news made me want to bang my head against the wall in frustration.

You see, senior American policy figures have repeatedly balked at doing anything about Chinese currency manipulation, at least in part out of fear that the Chinese would stop buying our bonds. Yet in the current environment, Chinese purchases of our bonds don’t help us — they hurt us. The Japanese understand that. Why don’t we?

Some background: If discussion of Chinese currency policy seems confusing, it’s only because many people don’t want to face up to the stark, simple reality — namely, that China is deliberately keeping its currency artificially weak.

The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different.

And in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs. Again, anyone who asserts otherwise is claiming that China is somehow exempt from the economic logic that has always applied to everyone else.

So what should we be doing? U.S. officials have tried to reason with their Chinese counterparts, arguing that a stronger currency would be in China’s own interest. They’re right about that: an undervalued currency promotes inflation, erodes the real wages of Chinese workers and squanders Chinese resources. But while currency manipulation is bad for China as a whole, it’s good for politically influential Chinese companies — many of them state-owned. And so the currency manipulation goes on.

Time and again, U.S. officials have announced progress on the currency issue; each time, it turns out that they’ve been had. Back in June, Timothy Geithner, the Treasury secretary, praised China’s announcement that it would move to a more flexible exchange rate. Since then, the renminbi has risen a grand total of 1, that’s right, 1 percent against the dollar — with much of the rise taking place in just the past few days, ahead of planned Congressional hearings on the currency issue. And since the dollar has fallen against other major currencies, China’s artificial cost advantage has actually increased.

Clearly, nothing will happen until or unless the United States shows that it’s willing to do what it normally does when another country subsidizes its exports: impose a temporary tariff that offsets the subsidy. So why has such action never been on the table?

One answer, as I’ve already suggested, is fear of what would happen if the Chinese stopped buying American bonds. But this fear is completely misplaced: in a world awash with excess savings, we don’t need China’s money — especially because the Federal Reserve could and should buy up any bonds the Chinese sell.

It’s true that the dollar would fall if China decided to dump some American holdings. But this would actually help the U.S. economy, making our exports more competitive. Ask the Japanese, who want China to stop buying their bonds because those purchases are driving up the yen. (Cui bono, Mr. Krugman, cui bono? - Jesse)

Aside from unjustified financial fears, there’s a more sinister cause of U.S. passivity: business fear of Chinese retaliation.

Consider a related issue: the clearly illegal subsidies China provides to its clean-energy industry. These subsidies should have led to a formal complaint from American businesses; in fact, the only organization willing to file a complaint was the steelworkers union. Why? As The Times reported, “multinational companies and trade associations in the clean energy business, as in many other industries, have been wary of filing trade cases, fearing Chinese officials’ reputation for retaliating against joint ventures in their country and potentially denying market access to any company that takes sides against China.”

Similar intimidation has surely helped discourage action on the currency front. So this is a good time to remember that what’s good for multinational companies is often bad for America, especially its workers.

So here’s the question: Will U.S. policy makers let themselves be spooked by financial phantoms and bullied by business intimidation? Will they continue to do nothing in the face of policies that benefit Chinese special interests at the expense of both Chinese and American workers? Or will they finally, finally act? Stay tuned