Tim Geithner “Discovers” Exchange Rate Problem
It is quite amazing that our current Secretary of the Treasury has finally discovered that there is an exchange rate problem, and that he must do something quickly to correct it. Ex- Treasury Secretaries as well as central bankers have apparently been equally unaware that the U.S. was running “unsustainable” trade deficits of a magnitude that have ruined less-favored countries in the past. In fact, trade imbalances of a scandalous amount, caused by exchange rate manipulations, have existed for the past 30+ years with U.S. government official making feeble if not ludicrous efforts to correct them. But now, Tim has “discovered” this problem and is dealing with Chinese authorities with a view of correcting it. The real story, hidden from the public, is that currency manipulations by the Chinese have been going on for quite some time, having caused the near-bankruptcy of many developing countries. Those occurring in the early 1990s have had particularly negative consequences.
But the U.S. government has ignored this problem for at least two self-serving reasons. The first involves the fact that the U.S. FED can print hard currency, money treated in the same manner as gold in the past, to replace those dollars lost to overseas traders. And the U.S. FED has no responsibility to convert the foreign dollar funds into gold (or anything else for that matter.) They will just give you two fives for a ten. The second is that U.S. multinationals will be making tons of money as long as the U.S. government continues to ignore the trade problem. A good deal of the manufactured goods coming from China are made there by U.S. multinationals and shipped back to the states. I believe that 90 percent of manufactured goods exported by China are made by foreign-controlled firms. Tim’s problem is that at this late date there is little he can do to alleviate these trade balances by way of exchange rate adjustment. This article explains why he will fail and proposes a solution which could be quickly implemented and could preserve the “free trade” regime so many of the financial elites are so enamored of (but it wouldn’t be so much fun because it would involve paying all workers of the world fairly).
Although current account imbalances were becoming a problem in the 60s, it wasn’t until President Nixon was forced to do something about them early in the 70s. With capital controls still in affect during the 60s, the U.S Federal Reserve was the sole entity who could effectively pay off our overseas trade imbalances, but the remedy involved a decrease in the money supply resulting from payments in gold.
By resolving these deficits by gold transfers, foreigner dollar holders were happy but the resulting decrease in the money supply in the U.S. (which at that time was limited by the gold held by the FED and U.S. treasury) resulted in recession. So in 1971 Nixon discontinued the payment of trade imbalances with gold. The dollar was devaluated in 1973 in order to shore up the money supply and floated, presumably to allow a devalued dollar to alleviate the trade imbalances (in theory a floating dollar would have resolved the imbalances, but of course the big boys didn’t really allow it to float.) Capital controls were lifted and foreign dollar holders could buy U.S. assets to likewise offset these imbalances, thereby taking pressure off the dollar on the foreign exchange market. Foreigner dollar holders, the beneficiaries of these trade imbalances, have been buying up the country ever since.
I estimate that in 20 years they will own approximately 75 percent of the all major U.S. assets (i.e., real estate, stocks, bonds, and money market funds.) There’s no amount of mischief foreign asset owners will not be capable of when that occurs. Shut down major operations in a corporation competing with their own firms overseas? Why not? Source all component parts with foreign suppliers? Of course. Bring in foreigner workers to fill prime positions in the corporations? Outsource even more of the work U.S. citizens are currently engaged in to companies in their home countries? They wouldn’t do that, would they? Damn right they would. So now those geniuses running our government have finally woken up to the dangers. Had they been vigilant, they would have strictly put their foot down in 1994 when the major damage occurred.
The real damaging currency manipulation occurred when China devalued the Yuan starting in 1990 and ending in 1994 when the Yuan was pegged to the dollar (at about 12 cents). It was devalued by 33 percent in 1993 alone and about 45 percent over this 4 year period. The wage differential between Chinese workers and comparable U.S. workers was about 20 to one, say, wage rates of 75 cents to 15 bucks after this devaluation. By pegging the exchange rate at this ratio, whatever happened to the dollar’s exchange value would not affect this wage imbalance between American and Chinese workers. Lacking any significant other event, Chinese workers would be getting almost all manufacturing work from U.S. multinationals indefinitely.
One way that wage rates could possibly converge, allowing U.S. workers a fair chance at obtaining manufacturing jobs, would be if local wage rates in China were to go up quite a bit, perhaps by as much as a factor of 10, or wages in the states to decrease by a factor of ten. Unbelievably, the powers that be in the U.S. have actually been trying for the past 20 years to drive wages down by means of recessions engineered by the FED, apparently hoping thereby to make up this tremendous wage differential. Of course this did not work because no one stateside can work for 1 buck/hour in the U.S. But these tricksters tried, and tried again, creating recession after recession with ever-higher unemployment rates which they coyly palmed off on the public as “normal”.
I suppose 10 percent unemployment will be the next “normal” unemployment rate (because even more people have recently “quit their jobs” to a) look for higher paying ones, or b) have chosen leisure over work (the 2 most common “stories” created by establishment economist to explain away the ever-higher unemployment rates.)) For Chinese wages to increase by an amount significant enough to resolve these trade problems, the Chinese government would have to allow an inflation which would increase local wages of an order of an unbelievable 1000 percent. Fat chance! China has proved that they have one of the best-managed economies in the world, coming out smelling like roses even after the latest U.S. banking fiasco had devastated most of the western world. China is committed to a low-inflation expansion, which they have been eminently successful at and which they would be foolish to change.
With neither of these prospective solutions having the least chance of success, U.S. government officials have tried (finally) to force the Chinese to adjust the exchange value of the Yuan. It will have to appreciate more than 500 percent to make it possible for U.S. wage earners any chance to compete. That will prove to be impossible, and Mr. Geithner will fail. Maybe he will get 5 percent appreciation and undoubtedly claim success. That will be like spitting in the ocean when it comes to U.S. trade imbalances. South Korea, Thailand, Malaysia, and Indonesia will most-probably benefit some, but increasing wage rates to even 2 dollars for Chinese workers when American workers are still making, say, about 12 bucks will not cause an avalanche of outsourced jobs back to the U.S. (nor prevent even more outsourcing).
So I am proposing the only solution, short of all-out protection, to reverse these trade imbalances and restore work to American wage earners. If workers engaged in the manufacture of internationally-traded goods were to be compensated under a single international fair wage regime, workers around the world would be competing on an equal basis, and work would undoubtedly find its way back to the U.S. At the very least, there should be a single international minimum wage, say of 7 or 8 dollars/hour. The ILO, the labor relations organization of the U.N., has established fair minimum wages for all workers on ships engaged in international commerce (about 8 bucks currently), and there is no reason that the workers making the goods they are transporting should not be treated the same.
Certainly corporations in low-wage countries, making out like bandits under the present regime, will not be anxious to do this. So, a concurrent trade rule, unilaterally applied if necessary, should be the imposition of tariffs equalizing the wage differentials involved on goods coming from these non-complying countries. This should quickly result in absolute compliance because the country imposing the tariff would be receiving the money which the non-compliers were withholding from their own workers. In other words, it would be crazy for any country not to comply. And it would be even crazier to simply cut off trade with the tariff-imposing country. China and half of Southeast Asia would fold in a day if America were forced to resort to this.
To emphasize the damage that the Chinese did by manipulating their currency during 1990-1994 on countries not having the special privilege the U.S. had of making up their trade losses by printing more money, the following resulted:
Mexican industry, formerly having a special advantage in manufacturing for U.S. multinationals, was hollowed out when these firms moved their production from Mexico’s “high wage” manufacturing sector (a whopping’ $3/hour), to China, where they could hire workers at 1 buck/hour (a subsistence (exploitative) wage there no matter what anyone tells you). This led to the Mexican Peso Crisis of 1994-1995 and consequent devaluation. The IMF promptly forced on the Mexicans its U.S.-inspired “Washington Consensus” assuring most workers a pathetic living standard for the foreseeable future.
Thailand, Indonesia, Malaysia, and South Korea all had to devalue their currencies in 1997, converting already low-pay workers into ultra-low-pay workers, in order to compete with the newly-engineered low wages in China. In the process, these countries also experienced a ruination of their economies, setting back progress in their living standard for years and wiping out scarce capital accumulated over decades of endeavor. The IMF quickly moved in to Thailand and Indonesia, causing extra damage to those country’s economies. South Korea and Malaysia fortunately saved themselves by opting out of IMF “assistance”.
All in all, thanks to China’s currency manipulation in the early 90s, wages worldwide began “a race to the bottom”, uncontrolled by the governments involved, and exploited by western multinational. The biggest losers were, of course, skilled workers from affluent western countries, but others throughout the world had to be contented with even more-exploitative wages. These practices will continue as long as the western governments fail to protect their own workers and allow their corporations to exploit workers in less-developed countries. Governments in these countries have failed to demand that foreign employers provide their workers with fair “living wages”, an excusable omission considering that if they did so, these corporations would simply move elsewhere. It is the responsibility of the western nations, who have the wherewithal and power, to correct these injustices. Simply by forcing a single standard international minimum wage of, say, 7 bucks would be a great beginning.
The author of this article, Richard Backus, is a journalist writing on politics and political economy. He currently resides in the Philippine Islands.