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Dollar Dollar Bill

By Matthew Yglesias  

"Dollar Dollar Bill"

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Paul Krugman posted an item laying out his view of the renminbi issue in more detail that I found very helpful. I don’t, however, totally understand his proposed remedy:

First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.

Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.

As I’ve wondered before, I don’t understand what kind of a world it is we’re living in when a great nation can’t think of a way to devalue its own money. The Chinese economy is large, but the American economy is much larger. If they can pursue large currency interventions to bolster the value of the dollar, can’t we pursue large currency interventions in the other direction to reduce it? The Chinese might try to compete with us for a while in a game of international currency chicken, but when the time is up our government will accrue a large capital gain and they’ll incur a massive loss.

What’s more, I’ve heard economists like Brad DeLong say that the markets are so fragile that Tim Geithner and other policymakers dare not explicitly say that they want the value of the dollar to decline lest they set off some kind of panic. Meanwhile Krugman observes that “many economists have a visceral dislike for this kind of confrontational policy.” I don’t have that strong a dislike for it, but shouldn’t we try something milder first. Like what if Geithner just wandered up and down 15th Street for a while telling people he had a new weak dollar policy? Maybe something more strident is ultimately called for. But I can imagine a variety of ways in which tariff threats could go awry and the notion that the mightiest empire the world has ever known can’t produce a cheaper dollar without first securing China’s cooperation in the matter strikes me as odd.

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