Trade Diversion

The US Treasury didn’t issue its currency manipulator report today, but there’s still plenty of reading material on the renminbi being published. The CEPR eBook The US-Sino Currency Dispute: New Insights from Economics, Politics, and Law, edited by Simon J. Evenett, is available online at www.voxeu.org.

Simon Lester rounds up many views from the renminbi discussion that’s been reinvigorated over the last two weeks or so.

NYT: “Ben S. Bernanke, the chairman of the Federal Reserve, said on Monday that global trade imbalances played a central role in the global economic crisis and warned that the both the United States and fast-growing Asian nations needed to do more to prevent them from recurring.”

HT: Thoma.

Fred Bergsten has a lengthy piece titled “The Dollar and the Deficits” in Foreign Affairs.

In brief: “The global economic crisis has revealed the folly of large U.S. budget and trade deficits, as well as the strong dollar that makes them possible. If it is serious about recovery, the United States must balance the budget, stimulate private saving, and embrace a declining dollar.”

He says that global imbalances facilitated the crisis: “These huge inflows of foreign capital, however, turned out to be an important cause of the current economic crisis, because they contributed to the low interest rates, excessive liquidity, and loose monetary policies that — in combination with lax financial supervision — brought on the overleveraging and underpricing of risk that produced the meltdown.”

He advocates reserve currency diversification: “For the United States to avoid the resulting trade imbalances and debt buildup, some of this incremental demand should be channeled into euros, renminbi, and SDRs. Both international monetary reform and a lesser role for the dollar are very much in the interest of the United States.”

Read the full article for much more.

An apt summary from Free Exchange:

The usual dynamics of any public discussion on a falling dollar are pretty well established. Lots of market watchers and pundits wring their hands over a poorly defined set of concerns, ranging from hyperinflation to wounded American pride. A number of economists respond that actually, the dollar is looking overvalued against a number of currencies at the moment, and an orderly depreciation of the dollar would go a long way toward improving America’s internal and external economic balances. And then some public official acknowledges that the economists are making sense, only to be chastised into a retraction of the statement by the market watchers and pundits. End scene.

And Martin Wolf points out that the crisis has made a subsequent fall almost inevitable:

We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

The desirability of such a decline is debated (follow the links), but the Free Exchange post accurately describes the conventional wisdom amongst economists.

Swaminathan Aiyar and Arvind Subramanian wonder why China is pushing for SDRs to replace the dollar when it could wait a few decades and move to make the renminbi the world’s reserve currency.

Congresswoman Michelle Bachmann is clueless about the dollar’s role as the world’s reserve currency. In fact, it seems she’s clueless about what a reserve currency is. That’s why, in reaction to China’s SDR proposal, she’s introducing legislation to “bar the dollar from being replaced by any foreign currency.” And apparently a lot of people are similarly confused and need a quick explanation of the difference between legal tender and currency reserves.

If Rep. Bachmann’s office needs some assistance with international economics, I’d be happy to provide some advice over the phone at a reasonable price.