by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Steve Forbes‘ latest Forbes magazine column focuses on the impact of China’s recent currency policies.
CHINA’S DEVALUATION of the yuan underscores the ongoing, dangerous, growth-retarding mess of U.S. monetary policy and, indeed, the fundamental deficiency of modern economic thinking. This intellectual bankruptcy threatens the ability of economies to grow and will consequently breed more political turmoil here and around the world.
Long term, it means the dollar’s days as king of all currencies will be over unless the next President knows enough to reverse the greenback’s decades-old slide in value.
Some key points:
• China’s move isn’t your traditional devaluation. Rather, it’s a response to the dollar’s recent (but temporary) surge in value. Dollar instability wreaks havoc whether it’s strengthening or weakening. A watch that can’t keep accurate time is useless, whether it’s too fast or too slow. On a trade-weighted basis the yuan had surged 22%, since mid-2012, before Beijing took action.
• The dollar’s strength will likely continue. Unless the Federal Reserve changes policy on interest rates and bank regulation, bank lending won’t be strong for consumers or small and new businesses. The Fed has effectively frozen bank reserves, which means that the very thing it and every other central bank ostensibly fears–deflation–will continue. The yuan, despite Beijing’s reassurances, will likely experience small, continuing devaluations–the opposite of the crawling revaluation that began in the middle of the last decade. Commodities, such as oil, gold and copper, will experience more downward pressure.
• Despite trying to compensate for the strong dollar, China’s move won’t be without consequences. A number of Chinese companies and local governments in recent years have taken on dollar-denominated debt, having forgotten what happened to similar borrowers during Asia’s 1997-98 economic crisis. The current upheaval will spur even more capital outflows from worried, well-to-do Chinese. The uncertainty will hurt domestic investment by internal entrepreneurs and will cause foreign direct investment to slow. Political tensions with the U.S.–already heating up (both Democrats and Republicans are increasingly angry and upset with Beijing’s growing assertiveness in claiming disputed waters and ocean real estate)–will be exacerbated.
None of this bodes well, short term, for a vigorous resumption of growth.