The Corner

Snow Job

Sometimes (only sometimes) it’s possible to feel a little nostalgia for the days of Robert Rubin. What is it exactly that the administration hopes to achieve with its current efforts to persuade the Chinese and the Japanese to let their currencies rise against the dollar? The weekend before last, comments, at the G7 summit on the need for the greater currency “flexibility” (apparently included in the final communiqué at US insistence) were widely, despite some confused attempts to muddy the waters, seen as a clear message to Peking and Tokyo to change course. Now, reinforcing that impression, Reuters is reporting that on September 12, Treasury Secretary Snow wrote Senators saying that he wanted China to move to a more flexible exchange rate policy “now.” The President stepped into the fray today in Chicago with the ludicrous comment that China should adopt “a monetary policy that’s fair.”

This is nonsense for any number of reasons (for example, as Bruce Bartlett has pointed out on NRO, a number of economists believe that an unshackled Yuan might actually fall), likely to be ineffective (in a very public snub to the White House the Bank of Japan intervened in the markets to push the Yen down today) and could actually be counterproductive. Like it or not, the US is running a very substantial current account deficit, and, like it or not, that current account deficit is very substantially funded by dollar/dollar securities purchases by the Japanese and Chinese central banks. Longer term considerations will probably mean that Japan and China will continue to do this despite dollar depreciation, but, not one imagines, suicidally so. Asking them to buy dollars at the same time as they are being told to let the dollar fall would be a tough sell at the best of times and this is not the best of times. At the very least the Japanese and Chinese would expect higher interest rates on their dollar investments, and that means higher interest rates for everyone here in the US, a steep price indeed to protect a few favored exporters, and far more damaging to the economy than a weak Japanese or Chinese currency.

Secretary Snow needs to start talking about something else.

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