In the past couple of decades, politicians have occasionally made hay regarding exchange rates, while accusing some countries of attempting to take advantage of others with currency manipulation.

David Glasner has a couple of great posts on the issue (here and here), and Scott Sumner as well, that shed light on the plausibility of the claim. So, I understand the finer points being made.

But I don’t necessarily understand why the politicians keep making this claim when it can be debunked, or at least be theoretically boiled down to a situational occurrence lasting on the short-term as to be of little consequence, if it manages to inflict financial damage on trading partners at all.

In the case of floating exchange rates, if the exchange rate on the yuan is made lower, on existing contracts denominated in dollars, the Chinese would injure themselves, because more yuan would be required to exchange for enough dollars to satisfy the contracts. If the exchange rate on the yuan is made lower, on contracts denominated in yuan, the Chinese injure themselves because people in the US would exchange dollars for yuan at the market rate at the time payment is due.

It appears to me that the yuan is, by some either formal or informal arrangement, intended to be pegged to the dollar, and the PBOC hasn’t particularly maintained the peg. But even in that case, the market exchange rate would still apply, unless perhaps the Chinese demand payment at parity. If they do demand payment at parity, that is, of course an entirely different problem that really can’t be described as currency manipulation.

If the accusation is lobbed that currency manipulation is to be blamed for the low prices of exports, which of course, when the accusation is lobbed, it is absent of any red meat and appears to rely on superficially plausible myths, I do not believe that it accurately describes competitive issues that may actually be real. We hear, preached to us nearly every day, the perils of higher than miniscule inflation and growing too fast as justification for monetary prudence, and allowing the dollar to appreciate uncontrollably. Then we look across the Pacific and see amazing growth without much of a domestic inflation problem and wonder about how upside down our world seems compared to theirs. If these assumptions about inflation and growth that have been imposed upon the public match reality, then why is the Chinese economy NOT in chaos?

Even with a very basic understanding of exchange, the “currency manipulation” accusation seems like much more myth than reality, or perhaps, an all-out demagogic falsehood. I suppose for politicians, it is easier to blame some else for the fact that in real terms the Chinese work for peanuts, while at home, we have injected extraordinary inefficiencies into our labor market with an out of control regulatory apparatus that is like an indirect tax on employing, in addition to directly taxing employing.

In my capacity as an enterprise architect, many moons ago, cost considerations for projects were paramount. And in order to estimate labor costs we would take the market wage for a given position to be filled and double it, because the total cost of any new employee was double the market wage rate. It may be more than that now, I have not estimated cost for a project in quite a while.  I use this experience here to broadly characterize the reality of domestic labor costs, which were then quite staggering.

We are not losing growth and employment opportunities because the Chinese are “currency manipulators.” We are losing them because government developed labor, tax, and monetary policies based on market realities that were true when the world was a much smaller place, but that reality no longer exists and there is no way to have the cake and eat it too in the world as it is now. We can’t have a human freedom condition ranked somewhere between that of Latvia and Estonia, with big, corrupt government to match, and not experience the same economic result. I hear often about labor sourcing where I work, and nobody is saying, “Hey why don’t we just hike it on over to Estonia and grab ourselves some engineers…” It just doesn’t happen – and I don’t think Donald Trump can bully them into saying it regarding the US.

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