Thursday, February 4, 2010

Should We Blame the Chinese for the Recession?

When the economies of Singapore, Indonesia, and other Southeast Asian countries crashed more than a decade ago, mobs of people rampaged in the streets, seeking out ethnic Chinese merchants and workers and beating and killing them. Why? Well the Chinese were convenient scapegoats.

Today, Paul Krugman, while not advocating mayhem and murder against Chinese (thank you for being civilized, Paul), nonetheless is trying once again to blame China for at least some of our current troubles. China, he declares, is using a "beggar-thy-neighbor" policy against us.

China's "crime," it seems, is undervaluing the Renminbi relative to the U.S. Dollar, having an official exchange rate that values its currency lower than it could get in the market. This makes Chinese exports cheaper relative to U.S. goods, which is one reason that American consumers can purchase inexpensive Chinese products.

However, such a policy encourages China to send its goods abroad, and it also means that such goods are more expensive at home than they would be in a free market. Thus, if anyone is being "beggared," it is Chinese consumers, who are being fleeced in order to permit Americans to consume more goods from China.

Obviously, this is a situation of poorer people subsidizing those who are wealthier. It is welfare in reverse, philanthropy from the poor to the rich.

American consumers are not the ones complaining. U.S. producers are not happy, and for all of the talk in Washington of protecting consumers, it is the producers who tend to be politically connected. Furthermore, if we are going to speak of real-live victimization, then perhaps the fact that the Chinese central bank has been purchasing boatloads of near-worthless U.S. Treasuries is the real scam.

Let's be honest, folks. For years, we have sent dollars to China, dollars that, frankly, are overvalued. The Chinese people have sent us goods, such as cell phones and computers, and in return the government has taken the money and purchased U.S. paper that depreciates daily. Who is getting the good deal, and who is being cheated?

I think that is a legitimate question, one that Krugman does not want to answer.


Unknown said...

The Chinese must surely be aware of this charade. Why would they continue investing in U.S. debt? What's their end-game strategy to all this?

earth that was said...

It would be interesting as an intellectual exercise to estimate the size of this massive (but informal) Chinese "foreign aid package" to the rest of the world.

As a completely unresearched and speculative guess, I'd say it would easily dwarf all the formal, official civilian foreign aid programs of the US and EU combined.

Unknown said...

I guess it's poor stereotyping to assume the Chinese will be cleverer and craftier, after all. They do have a massive real-estate bubble, a centrally-planned economy and swathes of vacant developments constructed out of "stimulus".

They're Keynesians in the end as well, I guess.