Ep. 26: Trump, China, Trade, and Currency Manipulation: It’s All Here

11 March 2016     |     Tom Woods     |     7

Krugman says both Trump and Romney get the economics of trade wrong, but as usual, it’s Krugman who makes his share of mistakes. With Bob on a lecture tour of Europe, Tom is joined this week by David Howden, chairman of the department of business and economics at St. Louis University’s Madrid campus.

Krugman Column

When Fallacies Collide” (March 7, 2016)

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Episodes Mentioned (Tom Woods Show)

Ep. 529 Leftist Site Attacks Gold Standard; Here’s Our Smackdown (Joe Salerno and Jeff Herbener)
Ep. 518 Woods Speech: What Has Government Done to Our Money?
Ep. 419 Austrian Business Cycle Theory: Answering the Critics (David Howden)
Ep. 367 Murphy Takes on Krugman on Recessions, Business Cycles (Bob Murphy)
Ep. 118 Boom and Bust: The Cause (David Howden)

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  • David A Galler

    Restrictions on trade are a bad business.

  • redacted

    Can I find these talks by Bob in europe somewhere?

  • martinbrock

    Depositing money in a bank is not a prerequisite for extending credit. Credit is not lending money that someone has deposited in a bank. It’s a “rent to own” agreement, the gradual transfer of title to property by permitting a buyer to possess the property while paying for it in installments. The creditor exchanges possession of the property, and ultimately title, for the promise of a stream of payments.

    The only prerequisites for extending credit are 1) an owner’s recognition that another person can profitably employ the owner’s property and 2) the other person’s willingness to accept costs of ownership, including depreciation of the property, as well as an obligation to make the required payments or surrender the property.

    Once an owner exchanges his property, say a house, for a right to a stream of payments, secured by a right to repossess the house say, he may bargain with the right. If I have a car and prefer to have a stream of payments secured by this house, I can exchange my car for the stream of payments.

    I don’t obtain title to the house in this way, and I don’t want the house. I want the stream of payments. A stream of payments secured as well by a different house, or by a parcel of land or a rare book or the copyright on a book, suits me as well. I don’t even investigate the nature of the security if I have enough trust in the issuer of the IOU.

    Since people will exchange a variety of goods for IOUs, regardless of the property securing the IOUs, as long as the IOUs are in fact secure, these IOUs are money. They’re not money because some statutory monetary authority declares them money. They’re money because people will exchange them for a variety of goods.

    The money supply is the supply of these IOUs, but the stock of IOUs does not obey a conservation law, like the supply of gold. IOUs enter the money supply when a seller extends credit and leaves the money supply as the buyer pays the creditor. No central authority over credit is necessary for IOUs to play this role as money.

    IOUs play this role, because the volume of credit, for the purchase of durable goods like houses, is so large. The value of all mortgaged houses is much larger than the value of all gold, and the value of these houses (and other goods securing credit) give circulating banknotes their value.

    Money is the product of credit, not the raw material for it, even in a free market with competing currencies. The Fed distorts the monetary system described above, but ending this distortion does not require people to save money (deposit banknotes in a bank) to enable extensions of credit. Banknotes exist to be saved only because people have already extended credit.

    In a free banking system, people deposit banknotes in a bank in order to receive the stream of payments associated with the notes, not to enable the bank to extend more credit. The bank’s ability to extend credit has little to do with these deposits.

  • http://www.economicmanblog.com Roger Barris

    This was bad. We do not help ourselves by making arguments that are this weak:

    1. To say that China cannot be a currency manipulator just because its currency is fixed versus the USD is nonsense. The question is: at what level is it fixed? China clearly was a currency manipulator, as is proven by the explosion of its foreign exchange reserves. China followed the same route as Japan did. In order to fix its foreign currency at an artificially low rate versus the USD, it had to buy USD in the FX markets, issuing domestic currency. This is exactly what it did. But, as Krugman pointed out, it is no longer doing this and in fact is doing the opposite, which is why its FX reserves are now falling rapidly. Romney was right (when he said it). Trump is wrong (when he says it).

    2. As an aside, the consequence of fixing its FX versus the USD in this way is that China lost control over its domestic money supply, which is one of the reasons why it is now experiencing a “boom/bust” cycle. I explained this here http://www.economicmanblog.com/2012/09/19/china-part-1/ and, more thoroughly, here http://www.economicmanblog.com/2015/01/21/switzerland-and-china/.

    3. Even if China had fixed its FX rate at the appropriate level at the beginning of the fix, then the huge BOP surpluses that it has run with the US would have naturally led to an increase in the yuan exchange rate. If China suppressed this increase, then it is still a currency manipulator. And it clearly did suppress this increase.

    4. The argument that our large BOP deficits with China reflect the lower cost of doing business in China (lower taxes and regulation) does not work unless you want to repeal the Law of Comparative Advantage. The average level of the cost of doing business should be equilibrated by movements in the FX rate, leaving only comparative advantage to explain the relative performance of difference industries, but not consistent BOP deficits and surpluses. This is comforting for free-marketers like us to hear, but it does not hold water as an argument.

    5. The argument that the Fed is also a factor in currency manipulation is true, but incomplete. Yes, the Fed can pursue monetary policies that suppress the value of the dollar but only in competition with other central banks that are trying to do the same to their currencies — as the recent dollar strength shows, the Fed has been losing this battle. But the Fed can and does pursue a loose monetary policy for other reasons, too, unlike the accumulation of FX reserves that China practiced, which was clearly only for purposes of currency manipulation.

    There is no doubt that China was a currency manipulator and that this accounted for a huge amount of its export performance to the USA. The question remains though, what the US should have done about it? The classical answers is “nothing.” By manipulating their currency, the Chinese just handed us a gift in the form of artificially low prices for imported goods, increasing our standard of living and suppressing the standard of living within China. Although this is the classic answer, I am not sure that it is correct. Given the size of the Chinese economy, and the extent of its currency manipulation, maybe the US should have taken action, as Megan McArdle (the closest thing to a libertarian that they have at Bloomberg) argues here: http://www.bloombergview.com/articles/2016-01-27/don-t-blame-americans-for-blaming-china
    In any event, we need better arguments than this if we hope to win the battle of ideas.

    • martinbrock

      By manipulating their currency, the Chinese just handed us a gift in the form of artificially low prices for imported goods, increasing our standard of living and suppressing the standard of living within China. Although this is the classic answer, I am not sure that it is correct.

      The answer is correct, but the gift is a Trojan horse if China suddenly withdraws it. Following the withdrawal, U.S. consumers buy fewer Chinese goods, but if Chinese consumption of their own goods rises commensurately, this loss of an export market is a blessing rather than a curse.

      Meanwhile, the U.S. has advanced unsustainably into the production frontier. While the subsidy persists, the U.S. produces fewer of the goods subsidized by China’s mercantilist trade policy. Being a leading economy, the U.S. responds by producing more goods never before produced, but following the withdrawal of China’s gift, the U.S. produces goods for which no market remains, so the U.S. economy contracts as prices of less advanced goods, now produced by China, rise.

  • BG

    So, the reason factories are moving to China is because of excessive regulations here? I thought it was because wages there are only $2/hr. No matter how many regulations are eliminated and efficiencies made, American workers cannot compete with wages of $2/hr, nor should they have to.

    The question is: why are wages only $2/hr in China? Is it because the currency is held down, pegged to the US dollar? Yes! As China grows at 7% per year, the value of the currency should be rising. It’s held low by the Chinese government because they know trade surpluses are good and trade deficit are bad. Our economists pretend not to know that.

  • Lodewijk Hof

    It is a pitty Bob was not here but a interesting talk. Is the true power of the economic succes of Switzerland not there history of privacy, security and integrity. All those things people are missing at there government.