Paul Krugman Takes on China's Currency Manipulation

Anyone reading this site knows we have talked in depth about China's currency manipulation. Now Paul Krugman takes it on, which is good news due to the devastating impact currency manipulation has on the U.S. economy, especially jobs and manufacturing.

Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion.

Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.

And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

Krugman then takes on the entire public justification for doing nothing, which is good old fashioned fear.

What you have to ask is, What would happen if China tried to sell a large share of its U.S. assets? Would interest rates soar? Short-term U.S. interest rates wouldn’t change: they’re being kept near zero by the Fed, which won’t raise rates until the unemployment rate comes down. Long-term rates might rise slightly, but they’re mainly determined by market expectations of future short-term rates. Also, the Fed could offset any interest-rate impact of a Chinese pullback by expanding its own purchases of long-term bonds.

It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.

Krugman also says we must play hardball and impose an import surcharge until China re-evaluates or floats it's currency.

Krugman just said the T word, tariffs, imposed across the board on China. I never thought I'd see the day Krugman would recommend action involving tariffs to save my soul, but this shows you how serious Chinese currency manipulation is.

Way to go Krugman!

Below is a clip from a conference on China Currency manipulation with Krugman:


For those not of the faint of heart, Krugman puts up a China capital export policy examples and what kind of effect that really has on the global economy.

what the Chinese government is doing here is engaging in massive capital export – artificially creating a huge deficit in China’s capital account. It’s able to do this in part because capital controls inhibit offsetting private capital inflows; but the key point is that China has a de facto policy of forcing capital flows out of the country.

Now, bear in mind the two basic balance of payments accounting identities:

Capital account + Current account = 0

Current account = Domestic savings – Domestic investment

By creating an artificial capital account deficit, China is, as a matter of arithmetic necessity, creating an artificial current account surplus. And by doing that, it is exporting savings to the rest of the world.

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China's water pistol

Here is something from Krugman's blog, Dean Baker's new, soon to be famous term, China's water pistol for what is pointed at the U.S. head.

Krugman pulls out some debt info, so you can see China is more of an idle threat. Backs up the op-ed.

Dual exchamge rate system

Mr. Krugman is treading on thin ice. It is very easy to rebuke the Chinese on their manipulation. Let us try to think this through. The idea of tariffs will plunge us into a trade war and subsequent poverty. What are we going to do about it? Here are some ideas from Ravi Batra's book "The New Golden Age: A Revolution Against Political Corruption and Economic Chaos" Dr. Batra proposes a dual currency exchange system. That since the yuan is pegged 8 to 1 dollar "Suppose the United States pegs the greenback at five yuan and makes this rate available only to foreign importers of manufacturing goods. This will cut our prices by almost 40 percent, and sharply increase Chinese imports from the United States, whose goods will become much cheaper in terms of the yuan." He promotes that trade deficits with other nations could be handled the same way. Not sure but I currently feel that we may have already passed the point of no return unfortunately.

China Trade Folly

More than 50% of China's exports to the USA are those from MNCs mostly owned by Americans. Appreciating the Renminbi will therefore cause a loss of market share for US investors and firms, and, this will transfer to higher costs for US consumers. This would have US consumers making a contribution to pay for a downturn caused by Wall Street. Clever.

A devalued dollar on the other hand has every nation that holds dollar related assets helping to ease the cost of Wall Street's blunder. As if the Plaza Accords taught us nothing.

If exports from China that only benefit the Chinese are evaluated separately from MNC platform exports, the ASEAN-China trade deal more than offsets any potential losses caused by elevated trade barriers to weak US markets. It is folly to think that China needs the USA more than the reverse scenario. The USA is the nation trading paper for goods.

Trying to blame China for holding back human progress, after the AAA fraud fiasco, is hypocrisy on steroids.

what was that about empty fear you don't quite get?

Firstly those U.S. companies can simply move production back to the U.S.....that is the entire point here, it's larger MNCs who are manufacturing in China, wiping out any domestic manufacturing new business I might add. "Lower costs" from Walmart do not compare to the job losses and income from the U.S. middle class, or the overall loss of GDP due to the non-oil trade deficit.

This is not human progress to enact global labor arbitrage and the statistics are overwhelming it is not.

I'll agree blaming china instead of derivatives themselves and I think you can throw in the credit ratings agencies in a big way is missing the point...

but on trade, you're just flat out wrong and that's the entire point, the U.S. is losing on trade in a big way and that's America, Americans in addition to the national interest, the trade deficit, GDP. A bunch of MNCs is assuredly not America or the national interest. Is the economy for a few MNCs running amok on the globe hunting for the ultimate cheap labor and means of production or is it for the overall economy? I think the later.

What kills me is the ignorance that somehow if one manufactures in the United States, the end of the world will happen. The China PNTR has only been in existence for 10 years and I think the results are in on what that has done.


Mr. Oak,

It is telling I think that those with weak arguments are the ones who resort to rude and insulting tactics. It is also clear now why this site is not getting much play.

Your argument is very similar to those regarding trade between the USA and Japan back in the 1970s. How did that help our manufacturing sector? How did that work out for Japan and Globalization? Why does the narrow view always have time for insults, but no time to consider applicable references such as the Plaza Accords or the Triffin Dilemma?

Anyway, argue with yourself.

calling the kettle black

Firstly this site is in the top economics blog rankings and it is the ONLY community site for the every man/woman on economics.

Sorry to disappoint you.

Secondly, I think it worked out for Japan very well and for the U.S., not so much if one bothered to pay attention to the long manufacturing decline.

If you want to blame Japan's woes on their manufacturing policy, think again.....or maybe the blinders to the Banksters do not allow that.

Trying to claim a Japan asset bubble, well, ya know you might consider looking at Japan's own policies...

Speaking of data, The Plaza accords was a planned devaluation of the dollar, so what that has to do with this is more spurious data spewn around

and trying to imply somehow the whole entire problem is the U.S. dollar as a reserve currency..

are you a People's Republic of China agenda troll?

Good god, blowing away the U.S. dollar as the reserve currency is their agenda and will wreck havoc with the U.S. economy.

Anywho, I think you're a representative of the People's Republic of China from your comments, which don't make a lot of sense.


Of course, low integrity tactics do have the historical option that tyrants not only prefer, but that they can not exist without. Censorship follows your previous comments as the logical conclusion to your downward trajectory. It was you though that resorted to insults and innuendo.

Populists do not help their cause with oppressive examples of just how dangerous ignorance can be when confronted with unassailable truths.

no we just do not allow empty comments which waste our time

with empty attack, rhetoric and either devoid of facts or spewing random citations with no relevance to the issue or topic at hand.

Sorry, no comment trolls allowed on EP. We do not have enough comment police as say dailykos does to get rid of 'em. Most are too busy trying to research out topics too because to be accurate, which we pride ourselves on, takes a lot of work, way too much of our time goes into useful activity vs. dealing with some jackass who for whatever reason or religion wishes to try to spam a website.

Speaking of which, to all EPers with accounts reading this comment, please do step up the comment police and discussion. All anonymous comments go into a moderation queue and that's because spamming is so intense (this is referrer spam, even malware attempts), as your friendly neighborhood admin, I take care of that end, but often I let through anonymous comments which are legit....but sometimes, as is the case with a few vested interests trying at all costs to protect their "emerging economy" financial investments as well as offshore outsourcing agenda in China...will heavily try to spam a site with real people. Case in point is the U.S. Chamber of Commerce literally has hired people to do this and as moderator, I have to clear out every single one of those. Obviously bought and paid for comment spammers are not legit, but then there are others, who say have their investment fund based on a permanent China currency peg and a never ending return advantage....who also get on the blogs and try to skew, do misinformation posts to try to stop a particular policy from happening.

Lobbyists and big money vested interests have deep pockets and they are like roaches, not just infesting the halls of Congress.

People who desire to see

People who desire to see China continue to under-value their
currency are just people who want to see the bargaining
power of every worker in the World race to the bottom.

They call themselves "market oriented", when, in fact, they
are market-distortion-loving commies.

And China is a right-wing, reverse-robin-hood commie country.

I used to be a programmer of mills and lathes. But that was
before my Cleveland company moved production to China.

So its me vs 12 Chinease slaves on manual knee-mills.

They couldn't beat me if they worked for free!

But thanks to their market-distortions, I'm outta bidness.

These "market-loving" right-wingers are the same people
who think that banks should be allowed to print money,
like a bunch of counterfieters, and lend it out at interest.

They are the epitome of reverse-robin-hood commies.

And they knoow exactly what I'm talking about, too.