To hear the latest batch of political salesmen tell it, China is a drug pusher in a schoolyard full of American schoolkids. The cheap goods the Chinese export market provides the American consumers may feel good, initially, but they are surely destroying America…causing manufacturers to shut down in the U.S. or relocate to China. Americans are, supposedly, trading jobs and long-term economic health to get their consumer goods at a great price.
The insidious method of this undercutting the competition? Underpricing of the currency. More accurately, however, the Chinese central bank is just matching the monetary inflation of the U.S. central bank. If China’s government underprices their currency, it’s only because they are trying to keep up with the U.S. government underpricing its currency.
Politicians are calling for China to knock it off. Or else. They want China to let their currency appreciate against the dollar, instead of losing value as quickly as the dollar.
In difficult times like these, it’s natural for people to look for someone to blame. The usual targets are being drug out before the crowds. The Occupiers around the world are blaming capitalism and the rich. The politicians in the U.S. are blaming China.
China’s undermined the might of U.S. manufacturing. They didn’t play fair. It’s not just a matter of outcompeting U.S. manufacturers on quality and price. They dealt from the bottom of the deck with currency manipulation.
That sort of thing ignores what policies and practices here in the U.S. might have done to make American business less competitive in the first place. It’s far easier to point the finger at foreigners.
Even if China’s currency is “unfairly” undervalued, politicians and lawmakers may be doing more harm than good by seeing to it that imports from China cost more.
This is where the unintended consequences come in. Unintended consequences are inevitable when politics interfere with individual preferences in the market. Tariffs or a rising renminbi would increase the price of Chinese imports in the U.S. This is supposed to lead to more jobs for Americans, as manufacturers would then find no benefit to set up in China.
But the goods produced here would be more expensive than they used to be coming out of China. More-expensive everyday goods are not exactly what Americans may need, with wages stagnant, falling and disappearing altogether.
The argument is that American jobs would be created, and the economy as a whole would be better off. But the true benefit would be for some exporting manufacturers, while the rest of society would pay for it in higher costs of goods.
Price inflation is currently written off as a nonissue because the “core” stuff of food and energy — which tends to rise plenty — are discounted. A rise in the renminbi would mean that all the other things Americans buy would no longer be cheap. Their prices would rise, too.
Further, a higher renminbi would mean that the Chinese themselves would have more purchasing power per capita. Right now, China’s government would like for its purported economic might to benefit its people, whose purchasing power has been kept down in order to fuel the export market. These Chinese consumers would use that stronger renminbi to bid for the the same commodities that Americans wish to buy. We wonder how long it would take for American politicians to start blaming the Chinese for allowing their currency to rise, and causing higher food and gas prices in the U.S.
So a rapid rise in the strength of China’s currency could, easily, mean higher prices for everything in the U.S. There may be a rise in overall employment, but there is certainly no guarantee for a rise in overall wages to offset higher prices. In fact, it’s unlikely that the Federal Reserve would abandon its inflationary policies anytime soon. So Americans may end up in much the same situation the Chinese find themselves in now: with a strong export market but declining purchasing power.
Our stance is that it was government that caused the problems in the first place and government that will make the problem worse with more nonmarket solutions. The U.S. is going down the path of protectionism, continued currency debasement, trade wars that could end up being hot wars.
After a generation of accelerated debt expansion, thanks to central bank policy that resulted in wild malinvestments and bubbles in housing and education, Americans will have to contend with being poorer for a while. The scapegoating of China may score political points, but it will lead to bad economics that will make life even harder for Americans.
And there’s always the possibility that protectionism could lead to open hostility between the U.S. and Chinese governments. Wars cost both human misery and dollars. They’re paid for with higher taxes and currency debasement. But wars also tend to get a lot of popular support, if spun properly. So Americans may cheer as they find their standards of living declining even further, while their troops are shooting at yet another enemy.
Gary Gibson is the managing editor for Whiskey and Gunpowder. He joins the Whiskey staff as a long-time fan and reader of both Whiskey and Gunpowder and the Daily Reckoning. A graduate of Fordham University, Gary now spends his days reading about and writing on limited government, sound money, personal responsibility and resource investing.
Gary, you don’t leave us with a very pretty picture there. I really don’t desire to go to war with China or anyone for that matter. But don’t you think that sentiment, not wanting to enter into another war, is predominate in the USA? Well, with the people anyway. I am not sure of the politicians as the President has just sent troops into Africa to fight with the so-called Lord’s Army.
I guess my point is that it would be real hard to spin something that would send us to war with them.
It would seem to me that the easier answer is to just start allowing our businesses here to compete competitively by eliminating so many of the blocks in the form of legislation that got us here. Though whatever we do you are certainly right that we are faced with learning to deal with having less.
I read of the effects of Smoot-Hawley many decades ago. I also recall an article from the 1960s about protectionism of New England shoe manufacturing against Italian imports. To save a $28,000.$/yr job cost shoe-buyers some $35,000 per year in the added cost of shoes.
America will never go to war against China because the U.S. government is too chicken****. America prefers to attack countries that are smaller and weaker.
Alright, Gibson, what did your machine do with a lengthy analysis of the possibilities of war with China? I knew I should have copied it before posting. LBT
The US Social Security program is complete mess. The funds needed to pay these benefits are quickly drying up, and agreeable solutions are in short supply. But all is not lost... There actually IS a viable way to "save" Social Security. But as Dave Gonigam explains, you're probably not going to like it. Read on...
This summer, the worst Ebola outbreak ever recorded hit sub-Saharan Africa. But the greatest danger, as Stephen Petranek explains, is that the virus will have a chance to mutate into a form that spreads more easily. And if that happens, there will be far reaching consequences - from both a health and an investment side. Read on...
Everyone in the world has a unique talent or skill that someone else might find useful. Whether it's editing video, speaking Spanish or even eating paper, chances are there is someone out there willing to pay for what you have to offer. Today, Chris Campbell shows you one way to find those consumers and how to make your skill work for you...
For the last few years, gun enthusiasts have been concerned that the Feds would find a way to block their access to firearms. Now those fears appear to be subsiding... and so do gun sales. Greg Guenthner explains how to navigate this market in the coming months and years. Read on...
The gold mining sector is one of the most difficult areas of the market to navigate successfully. But there is money to be made here. Henry Bonner sits down with one of the giants of this industry and picks his brain about how to find winners in this market and the four things every great investment has in common. Read on...