Tag: currency

Fact Checking the Washington Post’s Fact Checker on Trade and Manufacturing

Pinocchio Quattro!” is Washington Post “Fact Checker” Glenn Kessler’s response to Donald Trump, for his claims about trade, currency manipulation and manufacturing. No doubt the 4-pinocchio distinction is well-earned. Actually, without issuing a score, my analysis in Forbes today reaches similar conclusions.

Reading Kessler’s explanation and justification for the award, I was pleasantly surprised by how well he characterized and conveyed the salient, underlying trade issues. Non-trade experts and non-trade-beat reporters often miss the nuance and get things wrong. Nonetheless, for the purpose of even greater precision, I’m going to reiterate, clarify, amplify, and slightly modify some of the points Kessler makes. (Thanks for being a prop, Glenn).


Ukraine Hyperinflates

Since the New Year, Ukraine’s currency – the hryvnia – has collapsed, losing 51 percent of its value against the U.S. dollar. To put this rout into perspective, consider that the Russian ruble has only lost 8 percent against the greenback during the same period.

Like night follows day, the hryvnia’s meltdown has resulted in a surge of inflation. The last official Ukrainian year-over-year inflation rate is 28.5 percent. This rate was reported for January and is out of date. That said, the official inflation rate has consistently and massively understated Ukraine’s brutal inflation. At present, Ukraine’s implied annual inflation rate is 272 percent. This is the world’s highest inflation rate, well above Venezuela’s 127 percent rate (see the accompanying chart).

When inflation rates are elevated, standard economic theory and reliable empirical techniques allow us to produce accurate inflation estimates. With free market exchange-rate data (usually black-market data), the inflation rate can be calculated. Indeed, the principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable inflation estimate.

To calculate the inflation rate in Ukraine, all that is required is a rather straightforward application of a standard, time-tested economic theory (read: PPP). At present, the black-market UAH/USD exchange rate sits at 33.78. Using this figure and black-market exchange rate data that the Johns Hopkins-Cato Institute for Troubled Currencies Project has collected over the past year, I estimate Ukraine’s current annual inflation rate to be 272 percent – and its monthly inflation rate to be 64.5 percent. This rate exceeds the 50 percent per month threshold required to qualify for hyperinflation. So, if Ukraine sustains its current monthly rate of inflation for several more months, it will enter the record books as the world’s 57th hyperinflation episode. 

Chavez: The Death of A Populist … and His Currency?

Although Hugo Chávez, the socialist presidente of Venezuela, has finally met his maker, the grim reaper is still lingering in Caracas. As it turns out, Chávez was not the only important Venezuelan whose health began to fail in recent weeks: the country’s currency, the Venezuelan bolivar fuerte (VEF) may soon need to be put on life support.

In the past month the bolivar has lost 21.72% percent of its value against the greenback on the black market (read: free market). As the accompanying chart shows, the bolivar has entered what could be a death spiral, which has only accelerated with news of Chávez’s death.


Shortly before his death, Chávez’s administration acknowledged that the bolivar was in trouble and devalued the currency by 32%, bringing the official VEF/USD rate to 6.29 (up from 4.29). But, at the official exchange rate, the bolivar is still “overvalued” by 74% versus the free-market exchange rate.

Romney’s Misplaced Obsession with Chinese Currency Manipulation

More than anything else, Mitt Romney’s zealous determination to pin a scarlett “CM” on the Chinese government’s lapel has defined his trade platform.  And that draws an unfavorable contrast for Romney, since President Obama’s repeated decisions not to label China a currency manipulator make him look the more cautious, circumspect, risk-averse business executive that Romney portrays himself to be.

In any event, the currency issue is very much last decade’s battle.  By continuously harping about it, Governor Romney evokes tales of old Japanese soldiers, left behind on South Pacific islands, still fighting WWII well into the 1960s.

As I noted in this piece on Forbes yesterday, if Romney is elected he will  have to renege on this silly commitment (substantively, at least), and change focus:

If Mitt Romney believes in “free trade,” his focus with respect to China should be on correcting that government’s failures to honor all of its commitments to liberalize and on the misguided efforts by U.S. policymakers to thwart legitimate commerce between Chinese exporters and American consumers.

How to Destabilize the Hong Kong Dollar

Mr. Joseph Yam, former chief executive of the Hong Kong Monetary Authority, has proposed a package of policy changes that, if implemented, would undermine and destabilize the Hong Kong dollar—a unit that has been rock solid ever since Hong Kong established its currency board in 1983.  And if you doubt that dire conclusion, reflect on the fact that Argentina blew up its famed convertibility system (OK—it wasn’t a currency board, but only an unusual pegged setup) in 2001 by adopting a series of Yam-like measures.

Understanding the U.S.-China ‘Trade War’

An emerging narrative in 2012 is that a proliferation of protectionist, treaty-violating, or otherwise illiberal Chinese policies is to blame for worsening U.S.-China relations. China trade experts from across the ideological and political spectra have lent credibility to that story.  Business groups that once counseled against U.S. government actions that might be perceived by the Chinese as provocative have relented and changed their tunes.  Use of the term “trade war” is no longer considered taboo.

The media have portrayed the United States as a victim of myriad Chinese provocations, including currency manipulation, dumping, subsidization, intellectual property theft, forced technology transfer, discriminatory “indigenous innovation” policies, raw material export bans, industrial espionage, and other ad hoc restrictions on U.S. investment and exports.  Indeed, it is beyond doubt that certain Chinese policies have been provocative, discriminatory, protectionist and, in some cases, violative of the agreed rules of international trade.  But, as usual, the story is more nuanced than its early renditions allow.

U.S. policies, politics, and attitudes have contributed importantly to the atmosphere of rising frictions, as have rabble-rousing politicians and a confrontation-thirsty media.  If the public’s passions are going to be inflamed with talk of a trade war, prudence demands that the war’s nature be properly characterized and its causes identified and accurately described.

Politicians, policymakers, and members of the media should put down their battle bugles and consider that trade wars are never won.  Instead, trade wars claim victims indiscriminately and leave significant damage in their wake.  Even if one concludes that China’s list of offenses is collectively more egregious than the U.S. list of offenses, the most sensible course of action – for the American public, if not campaigning politicians – is for U.S. policymakers to avoid mutually destructive actions and to pursue constructive measures that will reduce frictions with China.

The full paper discussing this topic will be published sometime this week, but feel free to dikenson [at] cato.org">contact me if you would like a preview of its contents.


Facts That Lack Currency

In Washington, everybody seems to have an opinion about the Chinese currency these days.  But too often those opinions show contempt for the facts.

The prevailing wisdom—undergirded by theories and equations that may need updating in this age of global production sharing and transnational supply chains—is that an appreciating yuan will reduce the bilateral trade deficit, as U.S. imports from China become relatively more expensive for Americans using dollars, and U.S. exports to China become relatively less expensive for Chinese using yuan.

The lead article in Sunday’s Washington Post presents this point of view unquestioningly, and in the process foregoes an opportunity to explain to its readers that the relationship between currency values and trade balances, and between trade balances and jobs, is not as straightforward as many proponents of Chinese revaluation argue.

In the fourth paragraph, the authors write:

“Whether Saturday’s announcement [from the Chinese government that it will allow its currency to appreciate gradually] will help the U.S. economy depends on how much Beijing lets its currency rise.  A jump of 20 percent, for example, could cut as much as $150 billion off the U.S. trade deficit with China and create as many as 1 million U.S. jobs by making American exports more competitive, according to estimates by C. Fred Bergsten of the Peterson Institute of International Economics.  From 2005 to 2008, China let the yuan appreciate 20 percent against the dollar before it stopped the process while it confronted the global financial crisis.”  (My emphasis, primarily for what is absent from this sentence).

No doubt Fred Bergsten and his colleagues at the Peterson Institute know something about economics, but Bergsten’s projection should raise some red flags for anyone who’s been following this subject.   The authors cite Bergsten’s estimation that a 20 percent appreciation of the yuan could lead to a $150 billion decline in the U.S. trade deficit with China, and they even indicate that China has allowed that kind of appreciation before—from 2005 to 2008.  But then, inexplicably, the authors abandon what should be the next logical question in reporting this story: what happened to the bilateral trade deficit during that recent period of 20 percent yuan appreciation?  After all, if the authors are going to acknowledge that period of appreciation, then surely it should serve as support for Bergsten’s current projections of trade deficit reduction and job creation—unless, of course, it doesn’t.  And it doesn’t.

That recent period of Yuan appreciation (21 percent between July 2005 and July 2008) is associated with a U.S. bilateral trade deficit that increased by $66 billion from $202 to $268 billion between 2005 and 2008, and incidentally, the number of jobs in the U.S. economy increased by 3.5 million between July 2005 and July 2008 (the precise period of appreciation), from 142.0 million to 145.5 million.  It is confounding to me that reporters are still adhering, seemingly unquestioningly, to the pre-financial crisis, pre-recession fallacy that a trade deficit hurts the economy?  Didn’t our huge economic hiccup put that myth the bed for good?

Between the end of 2007 and the end of 2009, deficit hawks got their wish.  The U.S. trade deficit declined, and substantially, by $327 billion, from $702 billion to $375 billion.  But the huge payoff they promised never materialized.  Instead, U.S. employment fell from 146 million workers in 2007 to 138 million workers in 2009.  The unemployment rate increased from an average of 4.7 percent in 2007 to 10.1 percent in 2009.  What was that about currency values and trade balances?  And between trade balances and employment?

A review of Federal Reserve exchange rate data and Commerce Department trade data reveals that the textbook characterizations of an inverse relationship between currency value and the trade account does not hold for many of America’s largest trading partners.  Between 2002 and 2008 (before trade flows dropped dramatically across the globe on account of the recession), the dollar declined considerably against the Chinese yuan, the Canadian dollar, the euro, the Japanese yen the Korean won, the Indian rupee, and the Malaysian ringgit, yet the U.S. bilateral trade deficit with all of those countries (and the Eurozone collectively) increased, in some cases substantially.

As I suggested in this paper and in this op-ed a couple months ago, many factors, including income, the availability of substitutes, and perhaps most significantly, globalized production and supply chains influence trade flows.  Since somewhere between one-half to two-thirds of the value of Chinese exports to the United States comprise of value that was first imported into China (as components, raw materials, and the labor and overhead embedded therein), an appreciating yuan produces mitigating effects.  The appreciating yuan makes the price tag higher to Americans than before the appreciation, if all else were equal.  But all else isn’t equal.  The rising yuan also reduces the cost of production in China — the cost of imported inputs, which accounts for up to two-thirds of the U.S. price tag, on average (but far more for devices like the Apple iPod)–thereby enabling Chinese exporters to lower their price tags to American consumers.

The evidence, as presented in this paper, suggests that this dynamic played a big role in preventing the trade deficit from declining.  I wonder how these transnational production processes factor into Fred Bergsten’s economic models or whether the 2005 to 2008 period can be explained away as some anomaly.  Nevertheless, at the very least those data, that recent evidence, should be acknowledged and understood by economists, who in turn can help reporters provide a more complete picture to the public.