The U.S. Treasury currency report

Yesterday the U.S. Treasury Department releases its semi-annual currency report.  The big news was that the language toward China was significantly softened.  In the past China has been described as a currency manipulator.  But last month the Chinese stated their intention to let their Yuan currency rise relative to the U.S. dollar.  They did in fact allow that to occur.  However, the amount of the rise was negligible, and was largely a token gesture toward the U.S.  Clearly it was appreciated as the Obama Administration has backed off on its tough language toward the East Asian economic giant.

My own opinion is that I am disappointed with this stance.  I cannot figure out why the world’s second largest economy is in need of protectionist economic policies, which the fixed Yuan-Dollar peg represents.  Yesterday’s policy softening represents a subsidizing of the average Chinese worker by the United States consumer.  Let me explain.

The government of China’s social contract with its citizenry is that in exchange for denying them the opportunity of multiple political parties to vote for, they offer full employment.  That means that Chinese businesses are not run for profitability, but for full-employment.  That means that they are much more inefficient than comparable businesses the world over.  So how do they survive?  They survive because of massive subsidies from the Chinese government.  How do the Chinese afford this?  They pay for the inefficiency because of the massive U.S. dollar reserves that they accumulate from an artificially low Yuan currency.  That is, we in the United States buy artificially cheap Chinese goods due to the artificially cheap Yuan.  Those excess dollars are then funneled back into inefficient Chinese enterprises.  This is not a situation that can sustain itself long-term.  Unfortunately, the Obama Administration is pushing the day of reckoning further into the future.  And this is not my preference.

Jason