The bill to raise the value of the yuan might pass

So reports The Washington Post.  It is worth reviewing (my interpretation of) Milton Friedman:

1. Attempts to stabilize nominal exchange rates, as the Chinese are doing, can in fact be destabilizing, since the eventual adjustment will often come suddenly rather than gradually.

2. Accelerating that adjustment by passing laws aimed at foreign countries is unlikely to be a good idea.  The laws encourage a sudden adjustment now, become a focus on rampant speculation, and the target of the laws is unlikely to react with good grace or feel gratitude. 

3. In the long run a country can peg its nominal exchange rate but not its real exchange rate.  In other words, if the Chinese lower the value of the yuan sooner or later Chinese prices will rise to restore the appropriate terms of trade.  Sterilization of flows (e.g., soaking up Chinese money supply by selling bonds) can succeed for only so long and eventually the problem will cure itself.

4. We might have to actually apply the punitive tariffs.

In other words, this development is really bad news.


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