China: Krugman, New York Times Editorial, Beltway Gang ALL Wrong re Currency Devaluation

China: Krugman Wrong on Forex Devalution

Conventional academic economics is a disease.

Despite its pretensions and mathematical “certainties,” there is no department of social science much more dis-connected from its alleged subject matter compared to economics – and that is saying something, something not good.

So while particularly disappointing, it’s not particularly surprising whenever usually UN-conventional economists – notably Paul Krugman of Princeton and, more importantly, the actual New York Times, and Nouriel Roubini of NYU, aka Dr Doom, one of the few academics that had even the vaguest inkling the catastrophe of Black September 08 was coming – lapse in to the orthodoxies they generally eschew.

Intriguingly enough, these conceptual slides often come in the area associated with global trade and balance of payments, where or else smart people like Krugman as well as Roubini are seemingly unable to escape the stale platitudes they generally disdain when it comes to MOST issues of political economy:

in Roubini’s case, the “sub-prime” state of the US financial system like a whole, which he correctly warned about well before even the Bear Stearns collapse in March and, of course, Lehman Bros in Black September associated with 2008;

with Krugman, he’s on the mark regarding just about EVERY issue – recently, the IN-sufficiency of the Obama stimulus, which he properly said at the time it handed Congress would NOT be enough to promote a sustainable recovery, and the economic [not just human] imperative of SERIOUS health care “reform,”

although he was a little past due in realizing how significant a blockage the insane All of us campaign contribution “system” would be within achieving anything of actual value.

It was thus fairly disheartening to wake up on Monday, eager to read his latest clear sally against all things stupid in American political economy, to rather be blasted by his ill-mannered screed against China’s alleged forex manipulation, which is supposedly getting such a bad effect on the weak efforts at global recovery.

Tensions are rising more than Chinese economic policy, and rightly so: China’s policy of keeping its forex, the renminbi, undervalued has become a substantial drag on global economic recuperation. Something must be done.

And upon he went from there.

It was equally dismaying to read two days later on a New York Times content – whose board, like Krugman, has generally been notable in making strong and convincing quarrels against the babbling inanities that pass for “public discourse” in the US these days – taking the same sort of ill-informed collection on the whole question of Chinese currency values:

China’s decision to base its financial growth on exporting intentionally undervalued goods is threatening economies around the world. It is fueling huge trade deficits in the United States and Europe. Even worse, it’s crowding out exports from other creating countries, threatening their about recovery.

And on THEY proceeded to go, making more likely just the sort of worldwide trouble they correctly warned against at the conclusion, namely that “this difference [can] escalate into a fight that no one can win.”

So what is the problem with this line – and why does it go back to the nonsense associated with conventional academic economics ???

Put bluntly, both Krugman and the Times content board are ignoring the central fact of the world political economic climate that has existed since the late Nineteen forties: countries either sell to the US or even they sell to countries that sell to the US.

Instead, they are simply following the inaccurate – but ubiquitous – conventional academic economics Presumption that world trade should somehow be “balanced” – that is, that each country should have its industry and overall payments be roughly “in balance.”

In reality, this flies in the face of not just the current world political economic set-up, however the entire history of world politics economies that have existed, in a variety of forms, since at least 1815 and also the rise of the “second” British Kingdom, following its victory within the Napoleonic wars of the early 19^th hundred years.

“Equilibrium”, however, is a KEY concept of conventional academic economics – regardless of how non-existent it is in the real world – and they will try everything they can to POSIT equilibrium in almost any situation –

even if, as is the case with the current world economic downturn in general and trade picture in particular, it is completely ir-relevant to what is really happening.

Now most of the time, smart guys like Krugman / the New York Times Editorial Board Or Roubini realize this, especially when you are looking at DOMESTIC economies,

where it’s blatantly apparent equilibrium may be a “consummation devoutly to be wished,” but they recognize it for which it is: “a complete falsehood,” as Michael Corleone told the Senate in Godfather II.

But somehow, when it comes to problems with trade and the world politics economy – especially one in the actual terrible shape it is these days – they want to return to the emotional comfort of the dominant myths of their graduate school days,

and make-believe an equilibrium they know is completely fictional in domestic political economic climate somehow really DOES exist on the global stage.

In fact, nevertheless, it NEVER has – the actual US, for example has run an overall balance of payments deficit since 1959, and an overall trade deficit because 1971, without any appreciable decline within the American standard of living –

and, given the American-centered character of the world political economy since 1947, it never SHOULD.

Put bluntly, both the US and the rest of the world possess benefited greatly from a worldwide political economy that is essentially UN-balanced:

it is good for both America and every other country that the US run consistent payments and trade deficits, which will enable at least SOME countries to run payments and trade SURPLUSES –

which, by the way, are a) different and b) not necessarily good things in and of themselves, but that’s a subject for another day.

In reality, there ARE some countries that MIGHT be hurt by China’s fierce determination to hold on to a particular worth for its currency –

but they are certainly NOT developed economies like the United States as well as Western Europe, the Times’ editorial on the contrary.

Despite the rhetoric emanating from the US – but NOT other nations supposedly being hurt by the Chinese value, the reasons for which the Times can’t seem to figure out –

low-value-added Chinese exports TO the US and the rest of the developed world generally do NOT compete with high-value-added products arriving from those countries,

for the simple reason that low-value-added products left the developed world quite a long time ago as a result of wage levels which are simply too high.

Put bluntly, almost all the manufacturing jobs that left the US for Mexico or China or any other low-wage country are NEVER coming back –

and to pretend they are is not just absurd and self-delusionary analytically, but misleading to People in america and dangerous to world economic peace.

The first 3 are pretty obvious. However why is this nonsensical obsession with Chinese language currency valuations so inimical to world economic peace ???

Quite simply, because it pretends there’s a villainous motive at the rear of perfectly “normal” economic practices the US by itself a) has practiced for decades; and b) continually promotes in principle –

namely, the mobility of capital, which, as Karl Marx therefore eloquently pointed out, always seeks the lowest possible wages in order to get the actual highest possible profits.

In this context, the countries whose industries are most likely to be harm by low Chinese forex valuations are not the US and Europe – whose consumers only benefit from the low prices of Chinese exports –

but places such as Indonesia and Vietnam, whose manufactured exports contend directly with China, both in their own home markets and third markets like the US and Europe.

These countries definitely could have a case against China, although many of them offset their own problems with manufactured goods by making significant sales of raw materials to China itself.

But for significant and generally enlightened sectors of the American elite – like Paul Krugman and also the New York Times Editorial Panel, as well as the openly selfish web host of K Street insurance supporters swarming all over Capitol Hill –

to make a big deal about “low” Chinese currency ideals being in any way problematic for either the US or global economy is patently absurd.

As we have noted, US consumers – practically more than any major economic “actors” on the planet – in fact benefit significantly from low cost Chinese language imports,

as would European consumers, if their more protectionist governments might let them in, which, a minimum of so far, they remain reluctant to perform, given the political power of whatever domestic manufacturers may still can be found.

The problems with the US and, because the global political economy is American-centered, the world economies have little to do with China in general, and certainly NOTHING to use the value of China’s currency.

Those problems relate to the lies that America’s politics / corporate / press / academic elites have been informing the American people and the world – and, for all we know, themselves – since at least the Reagan regime, exponentially multiplied, obviously, during the age of Cheney / Bush.

And if the US is going to somehow manage to find a way out of the mess it’s in, it should stop blaming China, and admit, because Shakespeare put it, “the fault lies not in our stars, but in ourselves.”

But of course, that’s a great deal harder than shifting the onus onto one of the couple of countries in the world that –

for its admitted problems, above all within environmental / occupational / product safety, as well as independence of speech and individual rights –

has a political leadership that actually knows what it’utes doing when it comes to economic policy.

As all of us put it in the matter of Lehman / Repo One hundred and five and Goldman Sachs / Greece –

which are MUCH much more to the point when it comes to America’s real issues –

“Welcome to the Lost Years,” which are, unfortunately, only just beginning.

David Caploe PhD

Chief Politics Economist

EconomyWatch.com

President / acalaha.com