Tuesday, June 10, 2008


In an interesting op ed piece (“The Fed and the Price of Rice”) in today’s Wall Street Journal, Steve Hanke and David Ranson, aptly concluded that the “rice-price problem is a weak dollar problem.” They added: “Until the dollar strengthens, the nominal dollar prices of rice and other commodities will remain elevated.” This is not a new phenomenon, as they deduce from data dating back to 1949.

Meanwhile, Chinese spokesmen are railing against the weak dollar, suggesting that we ought to do something about it. Sun Zhenyu, China’s WTO ambassador, jabbed his American counterparts with these sarcastic words: "We hope the U.S. will not tell us this time as they did in the early 1970s to the Europeans, to say that ‘it is our currency, but it is your problem.’"

Perhaps the ambassador was surprised this morning when share values in Shanghai and Shenzhen fell by more than 8 percent. The steep decline was attributed to investor concerns the rising prices of food and oil, among other worries. Yet China’s cheap renminbi problem only compounds the problems caused by the weak dollar. As the lower greenback pushes commodity prices up, Chinese importers are forced by their government’s currency policy to pay extra RMB for each extra dollar in the international price. Is it any wonder that that China has an inflation problem?

In just two months, someone in Beijing will proclaim: “Let the Games begin.” On currency, the (blame) game is already underway. There is no individual gold medal in this game, however. In the long run, managing the world monetary system is a team sport in which there are only winners or only losers. Debating points are no substitute for real solutions.

Charles Blum

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