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Bernanke: China's currency policy is causing the slow growth in the advanced industrial countries
Howard Richman, 10/25/2011

Ben Bernanke said the following on October 4, when he testified before a joint congressional committee:

I do think that China's currency policy, besides creating problems for them -- in particular they've dealt with some inflation lately which is a result to a large extent of their currency policy -- has been to some extent preventing global adjustment. That is, we have a two-speed recovery, where emerging market economies have been growing very quickly and advanced industrial countries have been growing very slowly. A more balanced growth path could be achieved if there was greater flexibility in currencies. China's currency policy not only affects obviously U.S.-China relations, but it also affects third party currency policies as well." 

In a commentary on October 24, University of Maryland economist Peter Morici (The Fed Is Out of Tricks to Jump Start Housing and Economy) went just a bit further. He argued that the trade deficit must be addressed in order to jump start the U.S. economy. He wrote:

The U.S. economy does suffer from too little demand, and another popular myth is that this is also caused by households saving too much. Although the personal savings rate did jump from 2.4 percent in 2007 to 6.2 percent, just before the recovery began in mid 2009, it is now down to 4.5 percent.

The net impact on aggregate demand of the 2.1 percentage point increase in the savings rate is about $275 billion—this pales by comparison to the $550 billion drain on demand imposed by the trade deficit.

Moreover, Americans can only get along without saving a reasonable amount if they expect their government to borrow, forever, large amounts from foreign sources to finance their retirements. Greece has demonstrated how well that model works.

Nope. To jump start the economy, the trade deficit—which is almost entirely the deficits with China and on oil—must be addressed. That requires confronting China’s undervalued currency and mercantilism, and finally developing America’s abundant oil and gas resources.

Bernanke is figuring it out. Morici gets it. But the Obama administration is still clueless.

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Comment by harpat949, 11/7/2011:

I am astounded buy this currency policy statement. It only takes fifth grade math to understand that our labor rates are so high some thing like 50 times (never mind the exact figures) it will only harm us then help. If china's currency value is increased 20% their one dollar an hour labor will increase to $1.20. Big deal. How can we compete. Even 100% increase will not increase our exports. It sure will double our trade deficit. Some of our exporters will get more dollars but less Yuans but our imports are much higher and we will trashed like never before. With double the dollars coming in, China can afford to reduce their wages but that is my conjecture. China will only buy what it really needs and cannot make it locally and we are giving them technolgy for the asking to make every thing they need and to export. China's medcal spending per person is in the order of 200$ or less. Ours is over 10000$. An American company can hire 3 Chinese worker for the medical insurance alone they pay for An American worker even if works for wage. Why would any employer would want to create jobs here.

Raising the currency policy issue is diverting attention from the real problem. We are just creating one delusion after another because it creates a mirage that buys time for the politicians.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]