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Open letter to Donald Trump

Dear Donald Trump:

In your op-ed to the Wall Street Journal, you tell us that China unfairly uses currency manipulation as a weapon against the United States. In other words, pursuant to you, renminbi devaluation is tantamount to an attack on the United States. (For the readers, see: )

Objectively, your complaint about jobs “going” to China and China “cheating” on trade can be reduced down to you have a problem with China buying dollars. How, pray tell, are jobs “going” to China other than the fact that dollars are going to China? How and why, pray tell, do dollars go to China? Your problem is with trade. To me, the tea party looks to be Bushism plus protectionism, which actually makes Bushism look good in some ways. The tea party is smuggling neoconservatism past the electorate by amalgamating it with protectionism, and marketing protectionism as patriotism.

You say nothing about dollar devaluation. From what I can tell, you want the Fed to stay loose, but you don’t want China to buy dollars. Having the Fed stay loose in juxtaposition with protectionism is very dangerous. You are ignoring the underlying problem while advocating more intervention to try to mitigate the symptoms.

I’ll assume that you are an honest person and that you are genuinely confused, rather than a delusional criminal like so many people in Washington. Your confusion has begotten error, and error begets error. As I articulated in a previous commentary, you are inverting the flow of capital. It seems like that might be the genesis of your error. See: 151111

Prevailing economic orthodoxy tells us that dollar devaluation is good for exports. But it’s impossible to devalue the dollar to manipulate exchange rates without impacting any other prices. It might be true that devaluing the dollar will enable renminbi holders to purchase a greater quantity of dollars, but it will require a greater quantity of dollars to purchase goods and services in the United States. Therefore, real prices haven’t been lowered for renminbi holders whatsoever.

Now let’s switch around dollar and renminbi holders. It might be true that devaluaing the renminbi will enable dollar holders to purchase a greater quantity of renminbis, but it will require a greater quantity of renminbis to purchase goods and services in China. Therefore, real prices haven’t been lowered for dollar holders whatsoever.

Suppose the PBC stays tight while the Fed stays loose. That would create even more lopsided arbitrage opportunities, in which case capital will flee to China even faster. The old axiom about buying low and selling high is true, except in the world of central banking and the bond market. But do you really expect China to buy dollars while the Fed stays loose in perpetuity? Far from China being an adversary, China has helped postpone the day of reckoning by buying dollars.

Suppose the PBC loosens. Far from giving its exporters an advantage, it would actually give its exporters a disadvantage. If the Fed stays loose, China’s best course of action for its own national interests would be to tighten and decouple from the dollar (not unpeg, but decouple). Should Washington have the exclusive right to “print” the world’s “gold”?

The idea that we can repatriate capital by adjusting nominal tax rates in juxtaposition with the Fed staying loose is a delusion. Does scapegoating China for our economic problems make it more or less likely you would be able to attract Chinese capital if you were POTUS? If you really want to repatriate capital, then you should be demanding the Fed tighten and force up interest rates.


Mark Alvarez

Updated: April 3, 2018 — 3:33 am

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