Who is the Greatest Currency Manipulator (Part II)


Rod P. Kapunan

Part II

Japan tried to make concessions by promising to establish production plants for Toyota, Honda, Nissan, and Isuzu in the US.  Japanese negotiators argued that US made Japanese cars would be sold at competitive price and at the same time promising to provide employment to many Americans who were displaced by the closure of US car manufacturing plants in Detroit.

Trapped in its Own Game     

Since high tariff  would run counter to the provisions of the then General Agreements on Tariff and Trade (GATT) and discriminatory for that would in effect single out Japanese made cars, the US  shifted to pressuring Japan  to revalue its yen.  That was most devastating because that increased the value of its products not just for the single purpose of decreasing US trade deficit, but for the entire Japanese exports.   The domestic wage of Japanese workers equally increased.

The country suddenly experienced an unprecedented economic slump.  Exports sharply declined.  The home-based Japanese car manufacturers were compelled to open themselves to foreign partnerships.   Ford Motors was able to acquire shares of Mazda and Mitsubishi, GM was able to acquire Isuzu, and Nissan that was already on the verge of bankruptcy for the first the time hired a foreigner to take charge of the industry.

The system of capitalism is looked upon by the people in the East, particularly China and Japan, as akin to kung fu or aikido–to every offense there is  an equal defense.  It was on this aspect where the US failed to prepare.   When Japan was forced to revalue the yen that disastrously resulted in the steep increase in the prices of its exports, Japanese companies already had their fallback position which was to relocate their production plants to China.  Japan set aside their nuances on technology transfer through patent, copyright and trade secrets.

Companies such as the world famous brands like Toyota, Nissan, Mitsubishi, Hitachi, Toshiba, Komatsu, Sumitomo, Seki,    Fujitsu, Cannon, Fiji, Minolta,   Pioneer, Sony, garments such as Uniqlo, etc. no sooner established their respective manufacturing plants in China. Of course, there were some misgivings, and even political intrigues to the decision to shift to China their production plants because of their historical enmity, but both proved to be more pragmatic than the West – which is to set aside their past differences if the present could offer something that would help them economically advance.  South Korea, it seems is following the same footsteps.

China again welcomed this new development as it would not only accelerate their economic development from an essentially manufacturing economy to one that would give them the opportunity to make a “great leap” to becoming a technology oriented economy. Second, the migration of Japanese corporation to China would serve as windfall to further boost employment which China badly needed.  Third, the unexpected influx of Japanese companies allowed it to have an extended and unprecedented GDP growth rate of 8 to 11 percent annually.  Fourth, the US despite its misgivings was caught between devil and the deep blue sea for while it sternly fought to ward off Japanese exports to the US, Japan was able to circumvent by exporting more of its Chinese manufactured goods to the US.  Fifth, Japan managed to relieve itself of the burden of trying to justify its huge trade surplus.

Renminbi  Saved the world Economy

The revaluation of the currency is the single greatest culprit that could destroy the economy.  It is as John Perkins would describe the deadly weapon of modern-day economic hitman.  Fortunately, China is aware of this pitiful system that is why the revaluation of the renminbi is a non negotiable issue.  China sees the value of their currency as indivisible to their sovereignty.     As one Chinese trader would put it, when China opened its economy to the world market with their low value currency the world took advantage of it.  Now that they are experiencing trade deficit, they want the renminbi to increase its value to help their sagging economy.

Nevertheless, China helped the world by selling goods at much cheaper prices and it cannot now increase the price of its products on the basis of trade imbalance by increasing the value of its currency.  It was the monetarists that pumped in more money into their economy to allow the US economy to regain.  However, the cost of Chinese products remained unadulterated by inflation much that it refused to artificially pumped in more money.   They are the true value to what the Americans would say, getting back your money’s worth.

Today many Americans are losing their jobs, and wages in the US has remained stagnant for the last 10 years.  Maybe it is true that business has no patriotism.  But what the US is now experiencing is worst  because the issue no   longer revolves  on wage but  for want of employment, and this is what President Trump is talking about.   Industries, like migrating birds, want to nest in areas where it is safe and where they could prosper.

The unofficial pegging of the renminbi has not only benefited China but many countries.  The low value of their exports facilitated the rapid increase in trade, revived manufacturing, and allowed the transfer of technology.  Even the European Union benefited for it allowed them to keep at marginal level the value of their products.   Besides, it seems, the US is the only one complaining.

Quantitative Easing and Currency Manipulation 

Because of its inability to pressure China to revalue the renminbi, it resorted to the most debasing form of currency manipulation called quantitative easing.  That method allowed the US Federal Reserve to purchase more government securities from the market to lower interest rates and increase the money supply.  This would undoubtedly require the additional printing and putting into circulation of more money.  Quantitative easing is a stop gap measure.   However, unless it adopts drastic steps to put to an end the practice of overvaluing its currency without any corresponding increase in production, the US economy will continue to slide downward.

According to Kalen Smith, who holds an MBA in finance from Clark University in Worcester, MA, and guest blogger on behalf of Consumer Media Network quantitative easing creates its own deleterious effect.  There is the possibility the economy would cave in because of the vacuum it creates.   The disadvantages of quantitative easing are:

  1. It drives inflation much higher. As more money circulates through the economy, prices rise.  While the supply of money increases, the supply of goods remains the same.  This in turn leads to inflation that leads to the distortion of prices and incomes.
  2. It creates havoc in international trade. Newly printed money can be used by the government and consumers to import new goods and services from other countries. These goods and services are more or less coming in for free. The problem is that sooner or later other countries end up getting sick or exchanging goods and services for what they feel are worthless sheets of paper. In other words, the value of the importer’s currency decreases, that tends to discourage exporters. For example, China stopped exporting valuable minerals to the U.S. due to its quantitative easing program.
  3. Threat to the U.S. dollar. Many countries feel that currency manipulation like quantitative easing reflect an inability by the country to generate real growth and to honor debts. For example, other countries have become weary of lending the U.S. more money. Equivocally, the status of the U.S. dollar as the world reserve currency is in jeopardy.
  4. Encourages debt. The increased money supply and low interest rates encourage additional borrowing by both consumers and businesses. While some debt can help stimulate an economy, wanton loans and excessive debt can further exacerbate an already fragile one. Moreover, quantitative easing can lead to an increased government deficit as was the case of the U.S. in 2010 when it actually reached its debt ceiling. (rpkapunan@gmail.com)

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