The Times, the Dollar, and the Renminbi

http://www.futureofcapitalism.com/2011/08/the-times-the-dollar-and-the-renminbi

Yesterday, in an editorial headlined, "Half-Measures From the Fed," a New York Times editorial faulted the Federal Reserve for not doing more to debase the dollar. Said the Times, "The focus on combating inflation at a time when the economy is clearly not overheating and when oil prices are retreating is akin to Washington's fixation on spending cuts when the economy is weak. Both are a fundamental misreading of what the economy needs....the Fed could take modest steps, like shifting its portfolio toward bonds with longer maturities, which would help to keep long-term rates low and nudge investors into riskier investments. It could reduce the interest it pays on the banks' huge reserves or even tax the reserves to try to encourage more lending. It could also resume buying Treasuries or other securities to provide additional monetary stimulus. A more aggressive strategy would be letting inflation rise above the Fed's comfort level of 2 percent or so to, say, 4 percent. That could help the economy by easing the repayment of debt."

Today, in an editorial headlined "Where Will Economic Growth Come From," the same Times editorial board faults China for following the same cheap currency tack that the Times prescribed for America. Says today's editorial:

To keep its goods cheap, it has allowed its currency to rise only about 6 percent against the dollar since June 2010, even as the dollar has plunged against other currencies. Last month, the I.M.F. called on China to help global growth by letting the currency appreciate more rapidly, which would make Chinese goods more expensive around the world and give a break to competing manufacturers.

China has so far resisted that advice. It lashed out at economic mismanagement in Washington after the Standard & Poor's downgrade, which could potentially reduce the value of its $1.1 trillion stash of American Treasury bonds. Rather than berate Washington, it should abandon its currency manipulation. China's leaders have said they want to put more money in the hands of consumers through social programs and higher wages, and to rely less on exports. They can do this without stoking inflation by allowing the renminbi to rise significantly.

So when China pursues a weak renminbi strategy, the Times denounces it as "currency manipulation." But when it comes to the Federal Reserve's weak dollar strategy, the Times denounces it for, in essence, not manipulating the currency as much as the Times wants it to. Now, one can argue that Chinese monetary policy should be tighter and American monetary policy should be looser. That's what the Times is arguing. But I don't see how one approach, but not the other, qualifies as "manipulation."

On a related note, I chuckled at the line about how "letting inflation rise above the Fed's comfort level of 2 percent or so to, say, 4 percent....could help the economy by easing the repayment of debt." With $1 billion in debt, $400 million in cash, and a market capitalization of a mere $1 billion, according to Yahoo! Finance, one can understand why the Times would like a little inflation. As for Times customers, who already suffered from 1999 to 2009 a 233% increase in the single-copy price of their newspaper, to $2 from 60 cents, 4% inflation may be a little less welcome. Especially for those who don't share the Times's confidence that 4% inflation, once it gets under way, can be so easily controlled or turned off.

by Ira Stoll  |  Aug 11, 2011 at 9:48 am Related Topics:  China, Federal Reserve receive the latest by email: subscribe to the free futureofcapitalism.com mailing list