Currency Conundrum

An economy gripped by stagnation
Needs a weakening currency flotation,
But on this point, the Fed
Punts to Treas'ry instead,
Who repeat their "strong dollar" fixation.

UC Berkeley Professor Christina Romer, erstwhile head of President Barack Obama's Council of Economic Advisors, opined in the New York Times over the weekend on the disconnect between reality and posturing on the value of the dollar. While a weak dollar would encourage US exports and foreign investment inflows in a time of economic weakness, no US public servant will acknowledge this point, except to complain about the artificially low Chinese yuan. Failure to voice support for a Strong Dollar evidently brands one as un-American at home, and unfairly American abroad.

Tip o' the hat to Professor Greg Mankiw.

Higher Prices In China, Or Abroad?

If, for China to hike the renminbi,
A domestic political sin be,
But yuan 'ppreciation
Would quiet inflation,
Then therein the Yang and the Yin be.

China's Premier Wen Jiabao broke new ground for his government yesterday with a public acknowledgment of the role that a strengthening yuan could play in restraining Chinese inflation. Although the central bank had begun to allow very gradual appreciation of the renminbi ("people's currency") last summer, it has seemed until now that the government's top priority was to check the yuan's rise so as to hold down the prices of Chinese exports. Now however, rising inflation may bring Chinese policy more in line with that favored by competitors such as the USA and Germany. 

If It's Cheap Funding Yuan...

In Beijing they've enabled Hong Kong
To market yuan bonds for a song;
If they let these renminbi
In China, they'll then be
Enabling growth in Guangdong.


The Wall Street Journal reports that China is considering allowing the inflow of yuan that are borrowed in the low-cost financial center of Hong Kong.  This could not only give the domestic Chinese economy the boost of cheaper funding, but also create the first building blocks of an international capital market in their currency.

Yuan an Alternative?

The factors that long ago made
US dollars the means of world trade
May soon usher in the
Yuan (or renminbi)
For cross-border bills to be paid.  

China's currency may soon become a medium of regional if not global trade, writes Barry Eichengreen in the Wall Street Journal.  He argues that three factors led to the dollar's heretofore exclusive role: the depth of US securities markets (including Treasuries as well as the instruments for hedging risk); safety, particularly in times of international crisis; and the lack of alternatives.  China's growth may soon bring it the first two attributes, while making the third irrelevant.  The Euro, meanwhile, is even closer to becoming a dollar alternative.

Hu Wants a Strong Dollar?

Declared China's President Hu:
"With the Fed buying bonds as they do,
It touches raw nerves,
As our dollar reserves
May devalue a trillion or two."  

President Hu Jintao of China, in preparation for his state visit to Washington this week, expressed his unease with the course of the US dollar.  Responding to questions from the Wall Street Journal and Washington Post, President Hu said that the dollar as the international reserve currency is "a product of the past."  He also worried about the impact on China's $2.85 trillion of US currency reserves of the Fed's "quantitative easing" policy of buying treasury bonds to lower interest rates.  China fears that such stimulation will export inflation and cheapen its US dollar investments.  

Of course the Fed, as steward of the world's largest free-floating currency, does not have the luxury of the more direct forms of manipulation practiced in Beijing.  These are a source of irritation to many in the US, as they tend to cheapen Chinese exports and exacerbate the trade imbalance.  Should make for some interesting state dinner conversation with President Obama.

Yuanna Make Somethin' Of It?

Said Senator Dodd, "It's quite funny
How Beijing manipulates money;
The pace that it grew,
Though quickened by two,
Is too slow by a factor of twunny."

The Tao of Banking

"We're flush," said China's AgBank, 
"And the US consumer's to thank, 
But sustainable lending 
Needs more Chinese spending, 
To balance the Yuan and the Yank."

Yuan or Not?

In London, New York and Shanghai,
The Yuan was to reach a new high,
But when the Renminbi
Arose only minim'ly,
Many asked: "Why the Hu and the Kwai?"

Which Side are Yuan?

Beijing, in a currency detente,
Made a move quite well-timed and savant:
The yuan they'd let climb
With the passage of time,
Though perhaps not as fast as yuant.  

Currency Trade-Off

"I concede," says Premier Wen Jiabao,
"That the West wants a stronger Yuan now,
But if I acquiesced,
There'd be labor unrest
Here at home, which we could not allow."

Whose Dollar Is It Anyway?

The august Reserve Bank of Australia
Was to tighten their rates without failure,
When Beijing countered nimbly:
"You're tied to Renminbi -
Your policy tools won't avail ya."