I am getting quite confused by the currency manipulation discussion surround the Chinese RMB. Today, Nobel Laureate Krugman came up with this piece in the NY Times.
I read it once, twice, thrice. But I think I am missing his point still. Here’s where I think his logic lies. Exchange rate is determined by supply and demand of currencies, which in turn, should be determined by import/export balance (either capital or goods). It is a mechanism which should, in theory, make massive trade imbalances unsustainable. In theory, since this assumes free trade between all countries. Since the RMB is pegged against the USD, its value appreciates or depreciates with the USD. At the moment, the RMB is pegged at a lower rate than what it will be at, if traded freely (that’s the assumption, I have no idea).
I get all that. What I don’t quite get is how the peg is considered to be currency manipulation when pumping USD into the marketplace is considered not. When our Fed fixes interest rate at almost zero, requiring our treasury to issue bonds and purchasing them back… the result is massive pumping and devaluation of the currency. Yes, the USD is determined by supply and demand, but when we can create the supply and demand ourselves, how is that not manipulation?
My simple conclusion here is that we are trying to manipulate our currency, but the Chinese are getting in our way since they have their own manipulation mechanism.
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