If China's devaluing the Yuan, it suggests that the
economy there is slowing down too much. China remains export driven, and a cheaper currency makes exports more competitive.
Sources told Reuters that the move to devalue the yuan
reflects a growing clamor within Chinese government circles for a
devaluation of perhaps up to 10 percent to help struggling exporters.
Fundamentally however, exports mean that a country generates real goods, and then exchanges them for numbers in a spreadsheet, overall it's a better deal for the importer than the exporter. Life in an export-driven economy means you work hard, but don't end up with much for it because most of your output has been traded away for digital beads.
Mosler (and MMT) argues:
In a weakening global economy from a lack of demand (sales)
and ‘western educated, monetarist, export led growth’ kids now in charge
globally, the path of least resistance is a global race to the bottom
to be ‘competitive’. And the alternative to currency depreciation,
domestic wage cuts, tends to be less politically attractive, as the EU
continues to demonstrate.
The tool for currency depreciation is intervention in the FX markets,
as China just did, after they tried ‘monetary easing’ which failed, of
course. Japan did it via giving the nod to their pension funds and
insurance companies to buy unswapped FX denominated securities, after
they tried ‘monetary easing’ as well.
The Euro zone did it by frightening China and other CB’s and global
and domestic portfolio managers into selling their Euro reserves, by
playing on their inflationary fears of ‘monetary easing’-negative rates
and QE- they learned in school
No country is pursuing a fiscal strategy for increase demand and reduce unemployment. Ultimately, fiscal is all that will work, so we have our mix of deflationary low interest rates, increased risk of credit problems, and export-driven devaluation.
China was apparently intervening to prop up value of yuan (by selling UST), but relented and let yuan drop. Does that seem right? (My source for this noted that Chinese currency was remarkably stable for first half of year, while currencies around the world were falling against USD.)
ReplyDeleteI'm not sure what the mechanisms were, and I'm also not sure how China wants to manage exports/currency for US vs EU.
ReplyDeleteBut I was under the general impression that China buys UST to lower the value of the yuan, so why it would be under opposite forces I'm not sure.
Just goes to show I'm out of my league.
Doesn't really matter though -- the key is trying to see where aggregate demand can come from given global weakness and low interest rates.
I agree that global weakness is the important issue now.
ReplyDeleteWith regard to the yuan issues, Michael Pettis had an article on this yesterday Michael Pettis: Do Markets Determine the Value of the RMB?.
I have a little trouble with Michael Pettis because he doesn't share my (MMT) perspective on monetary systems. For example, he says, "(The PBoC) can chose to determine the size of the money supply (which it attempts to measure by looking at interest rates)". I'm sure the money supply in China is endogenous (not controlled by the central bank). But getting beyond that, he seems to be saying that China is trying to bring its monetary system in line with global standards by floating its currency and having open capital flows.
I realize this is a late comment, but I think it's important to acknowledge the movement of the Chinese out of China.
ReplyDeleteRussia and Brazil have devalued and I believe their citizen movement has slowed. India and China are still in a process that likely won't slow until exchange rates adjust.
I find it interesting foreign purchases of U.S homes account for near 1/2 of new home construction. Now I realize foreigners are not all purchasing new homes but they do form new households that would tend to increase new construction more than current citizens swapping houses.