ECONOMYNEXT – US claims that China is manipulating its currency is "purely political" amounts to an act war and is a repeat of false mercantilist acts that has failed in the past, a top US economist has said.
"In a purely political move, the Trump administration (read: the U.S. Treasury) has branded China as a currency manipulator," Steve Hanke, professor of applied economics at The Johns Hopkins University, Baltimore and a former advisory to President Reagan wrote in his column at Forbes, a financial magazine.
"This is an act of war. After President Trump announced that even more tariffs would be imposed on China, the markets took the value of the Chinese yuan down a notch or two.
"So, who was “manipulating” the yuan, Beijing or Washington? Well, it looks like Washington is engaging in yet another Asian currency war.:
US has employed similar tactics in the past against Japan when a trade deficit expanded and against China itself when the country was on a Silver standard and US was on Gold.
When Bretton Woods broke up in 1971 (under Bretton Woods US mercantilists could not falsely claim ‘undervaluation’ because currencies were supposed to be fixed), the Yen was about 360 to the US dollar.
Mercantilists blamed an ‘undevalued’ yen for its trade deficit, which was caused by a so-called income effect, mainly of the US borrowing abroad and excessive spending domestically or an ‘income effect.’
Mercantilists think there is something "wrong" with a trade deficit.
"To “correct” the so-called problem, the U.S. demanded that Japan adopt an ever-appreciating yen policy," Hanke said.
"The Japanese complied and the yen appreciated against the greenback from 360 in 1971 to 80 in 1995 (and 106, today). But, this didn’t close the U.S. trade deficit with Japan. "
The currency appreciation generated deflation in Japan but it did not reduce the trade deficit.
By 1991, 60 percent of the US trade deficit was due to Japan.
"Today, the U.S. is playing the same baseless blame game with China," Hanke wrote.
"And why not? After all, China’s contribution to the overall U.S. trade deficit has surged to 47 percent."
Hanke points out that even before fiat money, the US had manipulated currencies to cause economic chaos in China.
Under a gold or silver standard (the monetary anchor is the price of gold or silver) currencies on the same standard do not move if the central bank does not give large amounts of printed money as credit.
However when the price of the anchor metal changes (gold or silver prices) the currencies will move and it has nothing to do with trade. Sri Lanka’s rupee used to change against sterling when silver to gold parity changed during the currency board era.
"In the early 1930s, China was still on the silver standard, and the United States was not," explained Hanke.
"Accordingly, the Chinese yuan-U.S. dollar exchange rate was determined by the U.S. dollar price of silver.
"During his first term, President Franklin D. Roosevelt delivered on his Chinese currency stabilization “plan.” It was wrapped in the guise of doing something to help U.S. silver producers and, of course, the Chinese.
Using the authority granted by the Thomas Amendment of 1933 and the Silver Purchase Act of 1934, the Roosevelt Administration had bought silver.
Helped by silver bulls, the price of silver had gone up 128 percnet from 1932 to 35.
"Bizarre arguments contributed to the agitation for high silver prices," Hanke noted.
"Silver interests asserted that higher silver prices — which would bring with them an appreciation of the yuan against the U.S. dollar — would benefit the Chinese by increasing their purchasing power."
"But, things didn’t work as Washington advertised," he said. They worked as “planned,” however.
"As the dollar price of silver shot up, the yuan appreciated against the dollar. In consequence, China was thrown into the jaws of the Great Depression.
"In the 1932-34 period, China’s gross domestic product fell by 26% and wholesale prices in the capital city, Nanjing, fell by 20 percent.
"Realizing that all hope was lost, China was forced to effectively abandon the silver standard on October 14, 1934, though an official statement was postponed until November 3, 1935."
"The abandonment of silver spelled the beginning of the end for Chiang Kai-shek’s Nationalist government.
"America’s “plan” worked like a charm — Chinese monetary chaos ensued. This gave the communists an opening that they exploited — one that contributed mightily to their overthrow of the Nationalists.
"Today’s currency war with China promises to deliver what currency wars always deliver: instability and uncertainty."