In his first public lecture from the other side former Prime Minister Owen Arthur poked a little fun at his profession by suggesting that if the best economists were brought together they would struggle to reach consensus on anything. The current financial crisis continues to tax the ability of governments around the world. The complexity of the problem suggests there is no silver bullet to be found. Evidence of the hard truth can be witnessed in Barbados by listening to the Avi Persauds, Don Marshalls, Owen Arthurs et al. Sometimes we need to be reminded that economics is not an exact science and all of our solutions may not necessarily be found inside the bowels of that profession.
In the USA and beyond there is an interesting debate which has engulfed the news space. In an earlier blog BU referred to the fact that the US government will announced on the 15 April 2010 its position on whether it views China as a ‘currency manipulator’. By law, US [SIC] Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. As that date approaches several perspectives on the issue have started to emerge from leading economists in the USA. Leading the debate is Paul Krugman who to put it bluntly has issued a call for the US government to get more aggressive with China.
At the root of the China US problem has been the perennial belief by the US authorities that China has been manipulating its currency by selling the renminbi (Chinese Currency) and buying foreign currencies to keep the renminbi weak. Why would China want to encourage such a position? China with the help of the USA has become a major exporter, the Made in China stamp has become a global brand. The position of strength which China has found itself in recent years has assured that it has been able to accumulate a huge trade surplus with the rest of the world. Over the years it has invested over a third of its foreign reserves in mainly US government securities. The global crisis which had its genesis on Wall Street has seen the destruction of 40% of wealth in the USA. Of concern to the Chinese is the threat to the US dollar which if allowed to fall will have a negative impact on the trillions of dollars invested by the Chinese in the US markets. The US government’s willingness to print money on demand to keep its economy afloat adds to the crisis of confidence in the US dollar.
The USA in the years leading up to this point has with an avarice eye viewed the Chinese market as one best suited to feed its expansionist plan to feed its free enterprise appetite. The Nikes, Walmarts and others in order to satisfy the bottomless trough of shareholders have found their home markets wholly inadequate. Similar to the greed which precipitated the current global collapse so too it figures prominently in the looming conflict between China and the USA.
Some Barbadians may ask how does the potential conflict between China and the USA impact our island. The fact that successive Barbados governments have fiercely defended a policy to peg the Barbados dollar to the US dollar should make our interest relevant. Some economists are of the view that the symbiotic relation between the US and China will force them to maintain the status quo. The other camp believes there is the possibility of China supporting an alternative reserve currency to replace the US dollar, others believe that the US should abuse its position of owning the world’s reserve currency to increase the money supply to swap debt owed.
The interconnectivity of global economies will continue to give prominence to economists at large; the challenge will be for lesser mortals to separate the fish from the fowl.
The blogmaster invites you to join and add value to the discussion.