Thursday, December 11, 2008


The outgoing treasury secretary, Henry Paulson, came back from Beijing last week empty handed on the currency problem. Again. He’s tried everything – charm, logic, a magnificent scholarly discourse by Ben Bernanke on currency misalignment as an export subsidy, protests and pressure from Congressional leaders – to convince China to “accelerate the pace” of the appreciation of the renminbi against` the dollar. Nothing’s worked. In fact, the RMB has actually weakened since the opening of the Olympic Games, and some Beijing officials talk about a 6-7 percent further depreciation next year.

To make matters worse, the Treasury this week closed the book on eight years of missed opportunities by once again – for the sixteenth time – issuing a semiannual report to the Congress that failed to cite a single country for mercantilist currency practices. To be fair, the Clinton administration record after 1994 was no better. We might know obscenity when we see it, but some people just can’t detect currency manipulation anywhere by anybody despite a mountain of factual and statistical evidence.

In the meantime, Beijing seems paralyzed by internal dissensus on monetary policy. There is open talk from the top of the government about the need to stimulate domestic growth, to reduce the dependence on export-led growth, to keep inflation in check, and to meet the rising expectations of average Chinese for a viable social safety net, affordable homes, and more. The government constantly fiddles with tax rebates, export taxes, price controls, and credit restrictions; it loosens and tightens these crude policy tools in a frantic effort to keep Chinese economic growth on a stable path. Yet it constantly refuses to make use of the one sensible and available macroeconomic tool -- the rate of exchange for the renminbi.

There are many things about the Chinese I may not understand all that well, but I do know they respect strength. Not brute force, but a clear sense of national purpose and a willingness to stand up for legitimate rights and interests. Lacking that, diplomacy is just an empty exercise in rhetoric. Until and unless the US is ready and willing to back its often strong words with some meaningful leverage, “negotiations” over currency matters will produce no meaningful and lasting result.

As I’ve tried to express in earlier postings, five years of diplomatic dithering has produced no real progress toward rebalancing a dangerously out of kilter world economy. Rather, it has allowed a problem that in 2003 was essentially a bilateral trade problem to mushroom into a mammoth mercantilist threat to the world economy.

Thanks to a beloved former client, I have on my desk a small momento quoting Abraham Lincoln: “There is no lesson in the second kick of a mule.” I’ve been pondering this small bit of wisdom from our sixteenth president, wishing that somehow our forty-fourth president, an open admirer and close student of Lincoln, will benefit from the abject failure of his immediate predecessor to confront the currency problem. Let’s hope we don’t have to relive the past before we can escape it.

Charles Blum

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