China’s financial conundrum arises from two sources: (1) its large trade (saving) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead foreign curren...China’s financial conundrum arises from two sources: (1) its large trade (saving) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead foreign currency claims (largely dollars) build up within domestic financial institutions. And (2) economists – both American and Chinese – mistakenly attribute the surpluses to an undervalued renminbi. To placate the United States, the result is a gradual appreciation of the renminbi against the dollar of 6% or more per year. This predictable appreciation since 2004, and the fall in US interest rates since mid 2007, not only attracts hot money inflows but inhibits private capital outflows from financing China’s huge trade surplus. This one-way bet in the foreign exchange markets can no longer be offset by relatively low interest rates in China compared to the United States, as had been the case in 2005-06. Thus, the People’s Bank of China (PBOC) now must intervene heavily to prevent the renminbi from ratcheting upwards – and so becomes the country’s sole international financial intermediary. Despite massive efforts by the PBOC to sterilize the monetary consequences of the reserve buildup, inflation in China is increasing, with excess liquidity that spills over into the world economy. China has been transformed from a deflationary force on American and European price levels into an inflationary one. Because of the currency mismatch, floating the RMB is neither feasible nor desirable – and a higher RMB would not reduce China’s trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal yuan/dollar rate similar to that which existed between 1995 and 2004. But for any newly reset yuan/dollar rate to be credible as a monetary anchor, foreign "China bashing" to get the RMB up must end. Currency stabilization would allow the PBOC to regain monetary control and quash inflation. Only then can the Chinese government take decisive steps to reduce the trade (saving) surplus by tax cuts, increased social expenditures, and higher dividend payouts. But as long as the economy remains overheated, the government hesitates to take these trade-surplus-reduction measures because of their near-term inflationary consequences.展开更多
Instability in the worm dollar standard, as most recently manifested in the US Federal Reserve＇s near-zero interest rate policy, has caused consternation in emerging markets with naturally higher interest rates. Chin...Instability in the worm dollar standard, as most recently manifested in the US Federal Reserve＇s near-zero interest rate policy, has caused consternation in emerging markets with naturally higher interest rates. China has been provoked into speeding RMB ＂internationalization ＂; that is, opening up domestic financial markets to reduce its dependence on the US dollar for invoicing trade and making international payments. However, despite rapid percentage growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls （reinforced by financial repression in domestic interest rates） to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating （appreciating） exchange rate could attract even more hot money inflows, the People＇s Bank of China should focus on keeping the yuan/dollar rate stable so as to encourage naturally high wage increases to help balance China ＂s international competitiveness. However, further internationalization of the RMB, as with the proposed Shanghai pilot free trade zone, is best deferred until world interest rates rise to more normal levels.展开更多
China＇s financial conundrum arises from two sources. First, its large saving （trade） surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead, foreign ...China＇s financial conundrum arises from two sources. First, its large saving （trade） surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead, foreign currency claims （largely US dollars） build up within domestic financial institutions. Second, economists, both American and Chinese, mistakenly attribute the surpluses to an undervalued RMB. To placate the USA, the result was a gradual and predictable appreciation of the RMB against the dollar of 6 percent or more per year from July 2005 to July 2008. Together with the fall in US interest rates since mid-2007, this one- way bet in the foreign exchanges markets not only attracted hot money inflows but inhibited private capital outflows from financing China＇ s huge trade surplus. Therefore, the People＇s Bank of China had to intervene heavily to prevent the RMB from ratcheting upwards, and so became the country＇s sole international financial intermediary as official exchange reserves exploded Because of the currency mismatch, floating the RMB is neither feasible nor desirable, and a higher RMB would not reduce China＇ s trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal RMB/USD rate similar to that which existed between 1995 and 2004. However, for any newly reset RMB/USD rate to be credible as a monetary anchor, foreign ＂China bashing＂ to get the RMB up must end. Then the stage would be set for fiscal expansion to both stimulate the economy and reduce its trade surplus.展开更多
Under the world dollar standard, a discrete appreciation by a dollar creditor country of the United States, such as China or Japan, has no predictable effect on its trade surplus. Currency appreciation by the creditor...Under the world dollar standard, a discrete appreciation by a dollar creditor country of the United States, such as China or Japan, has no predictable effect on its trade surplus. Currency appreciation by the creditor country will slow its economic growth and eventually cause deflation but cannot compensate for a saving-investment imbalance in the United States. Under a fixed exchange rate, however, differential adjustment in the rate of growth of money wages will more accurately reflect international differences in productivity growth. International competitiveness will be better balanced between high-growth and low-growth economies, as between Japan and the U.S. from 1950 to 1971 and China and the U.S. from 1994 to 2005, when the peripheral country＇s dollar exchange rate is fixed so that its wage growth better reflects its higher productivity growth. The qualified case for China moving toward greater flexibility in the form of a very narrow band for the yuan/dollar exchange rate, as a way of decentralizing foreign exchange transacting, is discussed.展开更多
The international dollar standard is malfunctioning. Near-zero US short-term interest rates launch massive hot money outflows into emerging markets （EM） in Asia and Latin America. Each EM central bank buys dollars t...The international dollar standard is malfunctioning. Near-zero US short-term interest rates launch massive hot money outflows into emerging markets （EM） in Asia and Latin America. Each EM central bank buys dollars to prevent its currency from appreciating but loses monetary control. Despite some appreciation, average inflation in EMs is now much higher than in the old industrial economies and world commodity prices are bid up sharply. This inflation on the dollar ＇s periphery only registers in the US CPI with a long lag. However, the more immediate effect of the Fed＇s zero interest rate is to upset the process of bank intermediation within the American economy. Bank credit continues to decline while employment languishes. Therefore, constructive international monetary reform calls for the Fed to abandon its zero-interest rate policy, which is best done in cooperation with the European Central Bank, the Bank of Japan, and the Bank of England also abandoning their ultra low interest rates.展开更多
Because the U.S. Federal Reserve＇s monetary policy is at the center of the world dollar standard, it has a first-order impact on global financial stability. However, except during international crises, the Fed focuse...Because the U.S. Federal Reserve＇s monetary policy is at the center of the world dollar standard, it has a first-order impact on global financial stability. However, except during international crises, the Fed focuses on domestic American economic indicators and generally ignores collateral damage from its monetary policies on the rest of the world. Currently, ultra-low interest rates on short-term dollar assets ignite waves of hot money into Emerging Markets （EM） with convertible currencies. When each EM central bank intervenes to prevent its individual currency from appreciating, collectively they lose monetary control, inflate, and cause an upsurge in primary commodity prices internationally. These bubbles burst when some accident at the center, such as a banking crisis, causes a return of the hot money to the United States （and to other industrial countries） as commercial banks stop lending to foreign exchange speculators. World prices of primary products then collapse. African countries with exchange controls and less convertible currencies are not so attractive to currency speculators. Thus, they are less vulnerable than EM to the ebb and flow of hot money. However, Afi-ican countries are more vulnerable to cycles in primary commodity prices because food is a greater proportion of their consumption, and--being less industrialized--they are of their commodity exports. Supply-side more vulnerable to fluctuations in prices shocks, such as a crop failure anywhere in the world, can affect the price of an individual commodity. But joint fluctuations in the prices of all primary products--minerals, energy, cereals, and so on--reflect monetary conditions in the world economy as determined by the ebb and flow of hot money from the United States, and increasingly from other industrial countries with near-zero interest rates.展开更多
Under near-zero US interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows. Emerging market central banks intervene to p...Under near-zero US interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows. Emerging market central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and domestic prices begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis＇. This cyclical inflation on the dollar＇s periphery only registers in the US core eonsumer price index with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic finaneial intermediation by banks and money market mutual funds is repressed. Because China is forced to keep its interest rates below market-clearing levels, it also suffers from finaneial repression, although in a form differing from that in the USA.展开更多
文摘China’s financial conundrum arises from two sources: (1) its large trade (saving) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead foreign currency claims (largely dollars) build up within domestic financial institutions. And (2) economists – both American and Chinese – mistakenly attribute the surpluses to an undervalued renminbi. To placate the United States, the result is a gradual appreciation of the renminbi against the dollar of 6% or more per year. This predictable appreciation since 2004, and the fall in US interest rates since mid 2007, not only attracts hot money inflows but inhibits private capital outflows from financing China’s huge trade surplus. This one-way bet in the foreign exchange markets can no longer be offset by relatively low interest rates in China compared to the United States, as had been the case in 2005-06. Thus, the People’s Bank of China (PBOC) now must intervene heavily to prevent the renminbi from ratcheting upwards – and so becomes the country’s sole international financial intermediary. Despite massive efforts by the PBOC to sterilize the monetary consequences of the reserve buildup, inflation in China is increasing, with excess liquidity that spills over into the world economy. China has been transformed from a deflationary force on American and European price levels into an inflationary one. Because of the currency mismatch, floating the RMB is neither feasible nor desirable – and a higher RMB would not reduce China’s trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal yuan/dollar rate similar to that which existed between 1995 and 2004. But for any newly reset yuan/dollar rate to be credible as a monetary anchor, foreign "China bashing" to get the RMB up must end. Currency stabilization would allow the PBOC to regain monetary control and quash inflation. Only then can the Chinese government take decisive steps to reduce the trade (saving) surplus by tax cuts, increased social expenditures, and higher dividend payouts. But as long as the economy remains overheated, the government hesitates to take these trade-surplus-reduction measures because of their near-term inflationary consequences.
文摘Instability in the worm dollar standard, as most recently manifested in the US Federal Reserve＇s near-zero interest rate policy, has caused consternation in emerging markets with naturally higher interest rates. China has been provoked into speeding RMB ＂internationalization ＂; that is, opening up domestic financial markets to reduce its dependence on the US dollar for invoicing trade and making international payments. However, despite rapid percentage growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls （reinforced by financial repression in domestic interest rates） to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating （appreciating） exchange rate could attract even more hot money inflows, the People＇s Bank of China should focus on keeping the yuan/dollar rate stable so as to encourage naturally high wage increases to help balance China ＂s international competitiveness. However, further internationalization of the RMB, as with the proposed Shanghai pilot free trade zone, is best deferred until world interest rates rise to more normal levels.
文摘China＇s financial conundrum arises from two sources. First, its large saving （trade） surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead, foreign currency claims （largely US dollars） build up within domestic financial institutions. Second, economists, both American and Chinese, mistakenly attribute the surpluses to an undervalued RMB. To placate the USA, the result was a gradual and predictable appreciation of the RMB against the dollar of 6 percent or more per year from July 2005 to July 2008. Together with the fall in US interest rates since mid-2007, this one- way bet in the foreign exchanges markets not only attracted hot money inflows but inhibited private capital outflows from financing China＇ s huge trade surplus. Therefore, the People＇s Bank of China had to intervene heavily to prevent the RMB from ratcheting upwards, and so became the country＇s sole international financial intermediary as official exchange reserves exploded Because of the currency mismatch, floating the RMB is neither feasible nor desirable, and a higher RMB would not reduce China＇ s trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal RMB/USD rate similar to that which existed between 1995 and 2004. However, for any newly reset RMB/USD rate to be credible as a monetary anchor, foreign ＂China bashing＂ to get the RMB up must end. Then the stage would be set for fiscal expansion to both stimulate the economy and reduce its trade surplus.
文摘Under the world dollar standard, a discrete appreciation by a dollar creditor country of the United States, such as China or Japan, has no predictable effect on its trade surplus. Currency appreciation by the creditor country will slow its economic growth and eventually cause deflation but cannot compensate for a saving-investment imbalance in the United States. Under a fixed exchange rate, however, differential adjustment in the rate of growth of money wages will more accurately reflect international differences in productivity growth. International competitiveness will be better balanced between high-growth and low-growth economies, as between Japan and the U.S. from 1950 to 1971 and China and the U.S. from 1994 to 2005, when the peripheral country＇s dollar exchange rate is fixed so that its wage growth better reflects its higher productivity growth. The qualified case for China moving toward greater flexibility in the form of a very narrow band for the yuan/dollar exchange rate, as a way of decentralizing foreign exchange transacting, is discussed.
文摘The international dollar standard is malfunctioning. Near-zero US short-term interest rates launch massive hot money outflows into emerging markets （EM） in Asia and Latin America. Each EM central bank buys dollars to prevent its currency from appreciating but loses monetary control. Despite some appreciation, average inflation in EMs is now much higher than in the old industrial economies and world commodity prices are bid up sharply. This inflation on the dollar ＇s periphery only registers in the US CPI with a long lag. However, the more immediate effect of the Fed＇s zero interest rate is to upset the process of bank intermediation within the American economy. Bank credit continues to decline while employment languishes. Therefore, constructive international monetary reform calls for the Fed to abandon its zero-interest rate policy, which is best done in cooperation with the European Central Bank, the Bank of Japan, and the Bank of England also abandoning their ultra low interest rates.
文摘Because the U.S. Federal Reserve＇s monetary policy is at the center of the world dollar standard, it has a first-order impact on global financial stability. However, except during international crises, the Fed focuses on domestic American economic indicators and generally ignores collateral damage from its monetary policies on the rest of the world. Currently, ultra-low interest rates on short-term dollar assets ignite waves of hot money into Emerging Markets （EM） with convertible currencies. When each EM central bank intervenes to prevent its individual currency from appreciating, collectively they lose monetary control, inflate, and cause an upsurge in primary commodity prices internationally. These bubbles burst when some accident at the center, such as a banking crisis, causes a return of the hot money to the United States （and to other industrial countries） as commercial banks stop lending to foreign exchange speculators. World prices of primary products then collapse. African countries with exchange controls and less convertible currencies are not so attractive to currency speculators. Thus, they are less vulnerable than EM to the ebb and flow of hot money. However, Afi-ican countries are more vulnerable to cycles in primary commodity prices because food is a greater proportion of their consumption, and--being less industrialized--they are of their commodity exports. Supply-side more vulnerable to fluctuations in prices shocks, such as a crop failure anywhere in the world, can affect the price of an individual commodity. But joint fluctuations in the prices of all primary products--minerals, energy, cereals, and so on--reflect monetary conditions in the world economy as determined by the ebb and flow of hot money from the United States, and increasingly from other industrial countries with near-zero interest rates.
文摘Under near-zero US interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows. Emerging market central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and domestic prices begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis＇. This cyclical inflation on the dollar＇s periphery only registers in the US core eonsumer price index with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic finaneial intermediation by banks and money market mutual funds is repressed. Because China is forced to keep its interest rates below market-clearing levels, it also suffers from finaneial repression, although in a form differing from that in the USA.
