Chinese Currency Decision Could Be Obama's Biggest Wall Street Giveaway
By Mike Elk
April 5, 2010 - 1:25pm ET
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Despite the Treasury Department's decision to postpone a report that could have branded China a currency manipulator, the economic damage being done by the Chinese government is not ending anytime soon. When we talk about China currency manipulation, we often talk about the role it has played in the loss of 2.4 million manufacturing jobs since 2000 to China. We talk about how Chinese currency manipulation makes Chinese goods 20-40% cheaper than they would be if China priced its currency like everyone else in the world.
However, what Chinese currency manipulation is really about is freedom. It's about freedom from the power of an elite to negatively affect both Chinese and Americans workers in order to fuel their own greed.
Wall Street clearly profits from multinational companies that send jobs overseas. Want proof? Nearly the whole world, economists from the left to right have presented evidence that Chinese are manipulating its currency.
So who comes out and says China isn't manipulating its currency? Goldman Sachs. Jim O'Neil, the chief economist of Goldman Sachs penned an op-ed in the Financial Times last week claiming that Goldman Sachs' financial models showed China wasn't manipulating their currency. Might Goldman Sachs and their have a conflict of interest in keeping Chinese currency manipulation going? You betcha they do; Goldman Sachs makes billions of dollars in profit from China. Low environmental standards, low wages, and cheap currency means bigger profits for Wall Street.
It’s important to realize that we aren't just talking about Wall Street elites profiting off of China, Chinese elites profit as well. Corrupt Chinese leaders, unelected by their people, make huge amounts of money off of the companies coming to China. In order to do this, they keep Chinese workers wages low in part through currency manipulation. As the New York Times pointed out:
From 1998 to 2008, the total cost of labor that goes into producing one unit of output fell 40 percent in China as workers became better at making goods. Had Beijing not intervened in foreign exchange markets that higher level of output should have led to higher real wages in dollar terms for the Chinese workers as they approached American levels of productivity? But the currency appreciated just 15 percent in those 10 years.
“The Chinese government is taxing their own workers,” said Moritz Schularick, a professor at Freie Universität Berlin.
You can debate the effects this has on Chinese workers since it helps sells more goods abroad. However what is clear that Chinese elites have pursued an export driven strategy that is not focused on raising wages. China has made little investment in developing its own internal markets and raising the wages of its workers.
Indeed China is taking active efforts to suppress the wages of its workers. Independent trade unions are outlawed in China. As a result, Chinese workers aren't able to bargain for higher wages and wages are kept down by anywhere from 47-86% from the market would typically determine them.
Likewise the threat of shipping jobs to China is used to keep wages down and suppress unions in the United States. Kate Bronfenbrenner study of workplace intimidation "No Holds Barred" showed that 58% of the time companies threaten to close a plant and ship it overseas if workers vote for a union. The threat is an effective one for keeping unions out and workers wages low.
Keeping workers' wages low isn't sustainable and leads to economic bubbles. Right now all that is keeping Wall Street going is the bailout and the cheap cost of goods from China - the China Bubble. However, like the housing bubble, and the tech bubble before, the China bubble is about to pop. Economist James Rickard recently called China "the greatest bubble in history with the most massive misallocation of wealth".
As a result of this misallocation, American workers will soon no longer have the economic means to buy Chinese products. Chinese workers won’t be able to buy products with the wages they make. Chinese Lenovo CEO Yang Yuanging was quoted in Business Week advocating for appreciating the value of yuan saying that China fixing its currency would boost Chinese consumers' purchasing power.
Instead, China has pursued an export-driven strategy through Chinese currency manipulation that keeps wages low both in the U.S. and China. Without Chinese currency manipulation, China wouldn't be able to do this. A recent Bloomberg article noted that even a 3% appreciation of the yuan (which is expected to be undervalued by at least 20%) would result 30-50% plunge in profits for Chinese manufacturers. Noted financial expert Yves Smith commented:
A 30% to 50% fall in profits on a mere 3% rise in the RMB (already an admission that they compete only on price), says their margins are unhealthy even with the benefit of a cheap RMB. Margins that thin will not support needed reinvestment in the business (nominal depreciation is often too low to cover needed reinvestment) nor allow the business to have much in the way of buffers for any kind of shocks
As you see Chinese Currency manipulation is a big part of the glue that allows that holds this whole Ponzi scheme together.
As President Obama faces his decision to take on China's currency manipulations, he is faced with a choice about who runs our economy. Will he label China a currency manipulator and take the first step towards an industrial policy that encompasses everyone's voices and raises all boats? Or will he ignore reality and give Wall Street the biggest giveaway that could possibly be imagined?
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