It’s sunny today. Destroy your umbrellas!

May 15th, 2015 at 11:14 am

Just a brief note of confusion and befuddlement regarding a position on currency in the TPP that’s been uncritically picked up by news sources lately, including the WaPo today.

The position touted by the piece is that since China’s currency has floated down relative to the dollar in recent years (see figure), and their trade surplus is also significantly diminished, we don’t need to worry about them or other trading partners managing their currencies to get an export edge over us in the future.

This is wrong for at least three reasons.

First, as the title of this post suggests, just because something isn’t happening now doesn’t mean it won’t happen again later. The figure shows numerous periods of the yuan floating for awhile before a dollar peg again took hold.

If anything, I’m concerned that by announcing to the world that we can’t do anything about currency management without implicating our central bank, pro-TPP (and anti-currency-rule) forces are giving competitors the green light to revert to their old ways in this space with impunity.

Second, everyone, including the Post, is focusing only on flows while ignoring stocks. China still holds large dollar reserves (~$4 trillion), as does Japan, and this too affects exchange rates. As Bergsten and Gagnon put it: “China’s heavy past intervention has lingering effects on the level of the exchange rate, keeping it considerably lower than it would otherwise be.” Dean Baker makes a compelling connection on this point as well:

It is widely believed by economists that the Fed’s holding of $3 trillion of assets is holding interest rates down in the United States. The idea is that by holding this stock of government bonds and mortgage backed securities, it is keeping their prices higher than they would be if investors had to hold this stock of assets. (Higher bond prices mean lower interest rates.) If we accept the view that holding a large stock of bonds affects their price, then it must follow that the decision of China’s bank to hold a large stock of foreign reserves raises their price relative to a situation where investors held them. This would mean that China’s central bank is continuing to prop up the value of the dollar against its currency, even if it is not actively buying dollars.

Finally, a touch of game theory. If currency management is passe’–yesterday’s problem, as the Post implies–then why would it allegedly crash the TPP deal to include measures against it? If countries are so game to join the treaty, why would rules against doing something they don’t do anymore drive them from the negotiating table?

Here’s a DC truism for you: in their zeal for the deal, these trade deals make people say all kinds of unfortunate things.



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9 comments in reply to "It’s sunny today. Destroy your umbrellas!"

  1. John C says:

    You can bet that even if the TPP passes with a currency chapter, it’ll never be enforced. Nor will provisions be enforced to protect worker rights and health, or environmental concerns. What will happen is that corporations will sue foreign governments and maybe even the US government for any regulatory change which they claim affects their profits. Obama has been a corporate pawn in the past and he’s doing it again. Stop the TPP.

  2. Wondering says:

    Agreed. I think it is time to start meditation. It is hard to stay calm when people are making such large mistakes.

    • Wondering says:

      I once said a long time ago, the right agenda for the country would unite the Tea Party and the Occupy movement. They’re both populist movements, which is why they’re both against this deal. This is about elite corporate interests vs. the workers.

      If the deal passes, it is yet another piece of proof that democracy doesn’t exist anymore. It’s the workers against the corporate elite. Class warfare at its finest.

  3. SeattleAlex says:

    What are these ‘umbrellas’ you speak of???

  4. Kevin Rica says:

    Who said it’s not raining today? Maybe we just passed through the eye of the storm.

    “China Retakes Top Spot as the Biggest Foreign Owner of U.S. Debt”

  5. purple says:

    It is more concerning that many people in power see this as trade agreement as some sort of wedge to use against China. An aircraft carrier. That should be out of the question.

    • Wondering says:

      I’m not sure they do see it that way. I think it is a huge, despicable con job.

      Nike needs to seek more shoes for national security! It is the biggest lie of all.

      Obama should be ashamed of his naiveté and dishonesty.

      There’s no doubt in my mind that part of this has to do with Dodd and his movie business lobbying.

      I’m absolutely certain our leaders have no idea what they’re doing. No idea.