Early in its second term, cracks are already beginning to show in the Bush administration. President Bush's great appeal for the overhaul of Social Security has fallen flat on its face when his Republican Senators started talking to their voters. There is now a yawning gap between those Republicans who are calling for Federal support for stem cell research and Bush's fierce resistance. There is also, I believe, a bitter fight going on in the White House between those who want a rapid exit from Iraq and those who want to claim that the invasion has been a success.
But let us look briefly at the latest difference of opinion, and this, if anything, is more serious than any so far because it involves what could be a growing dispute with America's only remaining competitor for world economic supremacy -- China.
For the past 12 or 18 months the US Treasury Secretary, John Snow, has been calling for China to revalue its currency upwards so that America's increasing trade deficit can be reduced. And now some Republican Senators have also pitched in, saying that America must impose punitive tariffs on American imports from China unless the renminbi (yuan) is revalued within a six month deadline. If anything was more calculated to stiffen China's resistance to revaluation then this must surely be it!
But China is not resisting a revaluation of the renminbi just to annoy America but simply because it would raise the cost of living for 350 million of the Chinese of the coastal cities (never mind the 650 million poor people of the rural interior) who are now just beginning to lift themselves up by their bootstraps and to enjoy the goodies that Americans have had for a long time. China will revalue its currency in due course -- they have said so -- but only when it suits them. Besides, China has yet to reform its state banks which are still groaning under a legacy of debt left to it by the former communist system. Revaluing the renminbi would only make that problem worse.
As China says, it is an issue of sovereignty. When all the nations on earth started to go off the gold standard a hundred years ago and decided to issue their own national currencies whose values were backed-up by nothing more than their governments' say-so and the printing press, then it certainly is a matter of sovereignty. That the Chinese decided to link the value of the renminbi to the value of the American dollar some years ago is no different in principle to saying that the value of the renminbi could be linked to the value of wheat or rice, say, or gold or uranium or green cheese or anything else that may be considered to be of value. It's their business just as much as the value of the American dollar is America's business. When American Senators call for the revaluation of the Chinese renminbi in six months' time, it is just the same in principle to saying that the Chinese must not call themselves Chinese in six months' time or they must forgo the use of chopsticks.
Besides all this, most economists, American and otherwise, are of the opinion that even if China were to revalue the renminbi then it would only make a marginal difference to America's balance of trade because America's imports and exports to the rest of the world are far greater than its trade with China. The truth of the matter is that America, for the past few years, is proving to be defective in its ability to discover, make and sell goods to Europe and many other countries besides China even with a 30% decline in the value of the dollar compared with other countries' currencies. With respect to the euro (the European Union being America's largest trading partner) there has been a 60% decline in the cost of American-made goods and services. America ought to have been whooping it up with bounding exports!
And now, Alan Greenspan, the Chairman of the US Federal Reserve and America's second-most powerful man, has pitched into the fray. In total contradiction to Bush's Treasury Secretary he is saying that any revaluation of the renminbi would make little difference to America's problem. Hitherto, Greenspan has been a good friend to President Bush by keeping the interest rate absurdly low for the latter's first term. It has been so low, in fact, that it has been a negative interest rate for most of the time, being less than inflation. No wonder there has been a housing boom and any American with any sense has been borrowing as much money as possible to put into property -- the rich particularly. Forty per cent of those buying houses have been second-home buyers. (The pity is that those young people who have bought a house from necessity are probably going to feel the sting as interest rates are raised to normality.)
Incidentally, in reporting Greenspan's speech yesterday, the New York Times this morning preferred to ignore Greenspan's views about the renminbi and only selected his comments about American house prices. (Of which -- incidentally again -- Greenspan thinks that there won't be a slump. He is, of course, terrified that there might be because this would expose the irresponsible decision of the Fed to hold down interest rates in past few years.)
But back to the White House. Just what is going on in there apart from the most powerful administration in the world being in a state of dither? No doubt all will be revealed in due when Bush sorts it all out or, more likely, has it sorted out by those with the strongest views -- because, as a previous Treasury Secretary, Paul O'Neill, has said, Bush's "eyes glaze over" whenever economic matters are discussed.
Keith Hudson
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GREENSPAN: FLOATING THE RMB NOT HELPFUL TO US TRADE
Washington -- US Federal Reserve (Fed) Chairman Alan Greenspan said on Friday that the soaring trade deficits probably would not be helped by China revamping its currency system.
Answering questions following a speech he delivered to the Economic Club of New York, Greenspan said that a move by China to revalue its currency "probably quite unlikely" to reduce the US overall trade balance. Greenspan said that that is because US companies are likely to turn to other countries, such as Thailand or Malaysia for goods, rather than US producers.
"So essentially what we will find is we're importing from a different area, but we will be importing the same goods," Greenspan said. He also said that letting the Chinese currency move higher against the dollar would increase prices American shoppers pay for Chinese goods in the United States.
"The effect will be a rise in domestic price in the United States," he said.
The United States' trade deficit soared to a record high of 617billion dollars last year. The US government has been pressing China to stop linking its currency to the US dollar and instead move to a more flexible currency system in a bid to cut US trade deficit.
Chinese Premier Wen Jiabao said last Monday that China regards the reform of the exchange rate of Renminbi (RMB) as an issue of sovereignty and will never yield to any external pressure to change it.
Xinhuanet -- 21 May 2005
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Keith Hudson, Bath, England, <www.evolutionary-economics.org>
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