I’m a bit tired of the press hobby of endlessly debating which country was responsible for the Great Recession, or global trade imbalances, etc.

There are several reasons why this is a waste of time.

First, there is plenty of blame to go around, and many countries need to enact reform measures. Focusing on one mythical culprit will lull the others into a false sense of security. We can’t afford to leave any one “off the hook” at this time (i.e. there is broad responsibility for cleaning up the mess).

Second, the Great Recession and global trade imbalances are two different things (although they are related). It is possible, and reasonable, to discuss needed policies for fixing global trade/currency without getting into a protracted discussion of subprime mortgages and Wall Street.

Third, you can’t talk about domestic policies and politics on the one hand, and then deal with international effects, by moralizing. It is rarely the case that a country has set economic policy for the express purpose of hurting someone else. Enriching themselves yes, maximizing growth, sure, but setting out to sabotage another nation? I doubt it. And yet, assessing blame inevitably gets down to finger pointing, xenophobia, and a lot of flinging of feces at one another.

In this spirit, I appreciated the attempt of Mark Weisbrot in The Guardian to rise above the fray and explain why all the China bashing was misguided.

He certainly did that, but (and I am surprised to be saying this), I think he went a bit too far and became an apologist. The headline sums up the problem:

Exporting Blame to China: Pinning America’s economic woes on China is too easy. The real villains are Wall Street bankers and their influence.

I’m with the author on the first sentence. The second one just confuses me.

The article is all about the value of the US dollar against the RMB, with the author helpfully pointing out that a strong dollar is just the flip side to a weak RMB. He then makes the following suggestion:

While it is true that the Chinese could allow their currency to rise against the dollar, it is also true that the US Treasury has the ability to influence the international value of our own currency – just like China and many other countries do.

OK. I’m not an economist, and it’s been a few years since I took Monetary Policy in school, but China’s mysterious bag of currencies it uses to manage its rate is heavily weighted with US dollars (I assume), whereas the US has a freely-convertible currency.

In other words, sure, the US government could allow the dollar to fall (seems like it already has to some extent this year), but it’s China that is maintaining a managed float. In other words, the RMB is tied, to some extent, to the USD – not the other way around.

Does that make sense or did I embarass myself?

The US has done a lot of things badly, including its public/fiscal deficit. With respect to consumer debt, I’m a bit of a fan of Bernanke’s Savings Glut theory, so while I don’t assign “blame” to China (which is a moral judgement), I do think that there is a definite relationship between the cheap credit that fueled the mortgage meltdown and the huge pile of Asian savings that went into dollar assets this decade.

I therefore don’t think that discussion of the value of the RMB, which every freakin’ economist in the world (including China) thinks is too low, is an exercise in blame assessment. Recall that similar discussions were taking place in 2003, 2004, 2005 . . . you get the picture . . . long before the Great Recession crashed on all of us. This is a long-term problem that needs to be fixed; talking about the timing and scope of reform is a necessity.

All this being said, I don’t think that Obama’s visit will operate to push Beijing off their game on this issue. I don’t expect any movement on the RMB until well into next year, if everything plays out according to conventional wisdom (i.e. average growth projections). But as long as Obama does not engage in gratuitous RMB-based China bashing, he should of course bring up the issue.

This entry was posted on Friday, November 13th, 2009 at 9:59 pm and is filed under International Trade, U.S.-China Relations. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.