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The U.S. Can Lower the Value of the Dollar
For some reason, discussions of the U.S. trade deficit never mention the fact that the U.S. can deliberately push down the value of the dollar. An NYT article on Treasury Secretary Paulson's warnings against protectionist measures directed at China is an excellent example of the media refusing to discuss this option. At one point the article refers to a bill proposed by Senators Schumer and Graham which would require the Fed to act together with other central banks to lower the value of the dollar against the Chinese currency, if China did not take steps itself to raise the value of its currency.
There are reasons that people may decide that forcing down the value of the dollar is bad policy, but it is an option and the media should report it as such. We don't have to yell and threaten China to raise the value of its currency, the Fed could take action itself, and the public should know this.
--Dean Baker
COMMENTS (5)
As I understand it, China has fixed the value of its currency against the dollar, so that it goes down with the dollar. I don't know what the U.S. can do that lower the value of its currency only against the Yuan Renminbi.
On another subject, three years ago you were routinely dismissed as a Cassandra who did not understand how special and unique the real estate market is when you said that it was a bubble that was completely unsustainable and that a crash lay ahead. Now the same journalists (I guess) are writing stories like this: http://www.msnbc.msn.com/id/20728149/
But somehow, you are still not good enough to be a guest on "Meet the Press" or "This Week."
Posted by: Rick Kane | September 12, 2007 8:22 AM
Dean,
What specific action do you think the Fed could take to strengthen the Chinese remimbi vs. the USD?
Posted by: Max | September 12, 2007 8:50 AM
The Fed could in principle set a value of the dollar against the yuan, just like China fixes a value of the yuan against the dollar. The rate set by China is around 7.5 yuan to a dollar. The Fed could offer exchange yuan for dollars at a rate of 5.5 to the dollar. If the Fed was prepared to stand by this rate, it would become the effective exchange rate, since I'm sure that most of the Chinese companies looking to change currencies would manage to find ways to take advantage of the Fed's rate. China could try to maintain its rate and allow for the largest arbitrage profits in the history of the world, but it would soon end up with trillions of dollars that no one else wants. I assume that they would back down before it came to that.
Posted by: Dean Baker | September 12, 2007 10:12 AM
Hmmmm
Somehow, I don't think that would work. How does the FED buy Yuan? The FX market is restricted by the Chinese. I guess the FED could buy paper cuurency and put it in a mattress. But they can't open an account in China to hold Yuan. The Chinese would stop it. No bank in China would do it for them either for fear of the authoriites (bullet in the back of the head?)The US govt. has tried to intervene in FX markets before with limited success, but these have been free and open markets. They have never tried it in a closed market to my knowledge.
Posted by: Max | September 12, 2007 11:56 AM
The fall of the dollar was inevitable. It is the only way to get the trade deficit down to size. The real problem was allowing the dollar to rise to the point that it made such a painful adjutsment necessary. This was the Clinton-Rubin high dollar policy. It felt good in the short-term (except for manufacturing workers), but just like tax cuts that lead to big budget deficits, it could not be sustained.
Posted by: san | April 8, 2008 1:55 AM