Currency manipulation doesn’t actually work so well

That is the topic of my latest Bloomberg column, here is one excerpt on the empirical side:

It is also worth keeping in mind a number of empirical points. First, the ECB has not historically been all that expansionary. Rather, it is renowned for a fairly tight monetary policy. Eurozone rates of price inflation are usually below 2%, and that does not seem about to change.

Second, up through the late 1990s, Chinese currency manipulation consisted of keeping the value of the currency “too high” rather than “too low.”  Yet in those earlier times, Chinese exporters still were gaining ground. And since 2005, the Chinese currency has risen considerably — arguably, it has attained the levels one would expect in a normally adjusting market. More recently, the Chinese central bank may be propping up the currency, to limit capital flight from China. That is currency manipulation, but in a manner that will damage Chinese exports, not help them, and indeed China probably is headed toward having permanent trade deficits with the rest of the world.

Finally, countries with low household savings rates tend to run trade deficits, and of course that is the U.S., with savings rates usually below 10% and often as low as 4%. Obviously, if you spend most of your money, some of those expenditures will go abroad, and that will hurt your trade balance. Whether or not you think that is a problem, America’s savings shortfall has little to do with Chinese currency manipulation.

Of course President Trump and yes also Elizabeth Warren are the main offenders here.  Read Warren’s Medium essay on these topics, it is shocking in its crude nationalism: “A Plan for Economic Patriotism.


Tyler, you seem to have a muddled argument in this article.

First you say:

"The president has repeatedly criticized China for “manipulating their currency,” while Democratic presidential candidate Elizabeth Warren has called on the U.S. to do some currency manipulation of its own."

Then you immediately follow up with:

"The reality is this: Currency manipulation is not powerful enough to create long-run trade imbalances, and the benefits of such manipulation are extremely limited for the home country. That is the consensus view of mainstream economists, not a partisan perspective."

Just because currency manipulation isn't powerful enough to create long-run trade imbalances doesn't actually disprove the point that countries are actively attempting it. And if it's not powerful enough, why do we care if the US attempts it?

Either it makes a difference and we should address it, or it doesn't, and it's relatively harmless (though pointless) to attempt it.

@RIPM - I, like probably you, used to think currency rates (and interest rates) matter, this is also known as "monetarism". The empirical evidence shows they don't. The first shock came in 1988 when a scholar named Stockton (not Dave, apparently now deceased) showed that massive nominal swings in currency exchange rates had... no discernible real effect. Over the course of a business cycle, currency effects, if the currency is floating, wash out. If it's pegged, then it works until it breaks. But in every case currency (and by extension Net Exports in your famous identity for national income Y = C + I + G + NX ) don't matter. Which, solving for the equilibrium as our host likes to say, means for a big economy like the USA, "free trade" doesn't matter. And as Prof. Irwin tells us, "Smoot-Hawley" didn't matter. And as AlexT told us a week ago, Baumol's cost disease means even productivity for the non-service sector doesn't matter (wages inflate in those areas where productivity is less, though of course we all enjoy more things due to greater productivity). In fact, if you adjust and normalize variables, nothing matters. Years ago I read a summary of a paper that claimed mechanical refrigeration didn't really matter, since back in the days iceboxes (which lasted until July! straw covering blocks of ice) replaced refrigerators and did almost the same thing, obviously at a lower level (people ate more salted food, which, btw, except for a slight raising of blood pressure, is not that bad a thing, i.e. salty food doesn't matter).

Bonus trivia: July 4, 1850, Pres. Zachary Taylor died after gulped down a large quantity of cherries and iced milk and several glasses of water. I bet he wishes he didn't drink that iced milk, which even today (milk tea poisoning, happens every year) is a cesspool for pathogens. Penicillin? Except in special cases, and very overused these days along with all antibiotics, doesn't matter. Musca domestica? Harmless, largely doesn't matter. Burying the dead? Id. Everything is similar.

Pure rationalization.

Trade deficits are bad therefore efforts to reduce or eliminate trade deficits are good. Shipping jobs overseas is bad, therefore efforts to bring jobs back is good. But some would think that this is "crude nationalism". Apparently loving your country more than you love another country is crude or bad.

China is the bad guy in this. Everything China has done for the last 60 years or so was intended to harm us and benefit them. It is incredible that our politicians have allowed and even participated in this. But, at least they weren't "crude nationalists". Instead they accepted money from big business and foreign countries to do their bidding and harm our country and our citizens. But against all odds we got an honest person in the presidency and he is trying to level the trade field.

IMHO the very worst thing that could happen if China plays the hard line and chooses a full blown trade war. The very worst possible outcome would be that we get all those jobs back and our trade deficit with China drops to zero.

Exactly. I'm a big fan of Tyler, but I think he cares as much about Ethiopian poverty as he does American. That's great. He's a world citizen. But when you elect a president that person is looking after the interests of a specific group of people, namely 'Americans.' Obama always seemed to forget that as he too felt 'crude nationalism' was in essense vulgar and being KOOL required being globally minded.

cares as much about Ethiopian poverty

There will be lots of it to go around when(ever) the East African Drought returns. The EAD will drop the population to about 60 million unless we feed them. What is it now, about 110 million?

The adjective "crude" is meant to be doing a lot work here, but what part of the Medium essay was I meant to find objectionable or factually inaccurate?

If it doesn't work well to manipulate currency,why don't we carry a better measure?In my experience,the USA always try to find a fault with its competitor when it wants to "punish"them.

One wonders what effect Libra will have on currency manipulation (or market fluctuation for that matter). Unstable currencies could adversely affect trade. Cowen previously had a blog post on whether Libra could affect monetary policy, and Scott Sumner followed it up with a blog post about Libra and inflation. I know Cowen favors "disruption", but do we really need lots of disruption with currencies and monetary policy? An aside, the latest rumored Trump appointment to the Fed, besides wanting interest rates reduced to zero, as I pointed out in a prior comment, wants the US to go back to the gold standard. Jeepers! And here's a heart warming story about a family that sold the farm, invested all of the proceeds in Bitcoin, and is traveling the globe in search of places to stay that take Bitcoin. With so many people suffering severe cases of stupid, the world must be about to end.

Probably not much as Libra will probably be a big flop, if it even gets off the ground at all.

Look, I'm no fan of Zuckbucks but Facebook has billions of users. They need only a small fraction to use the darn thing and they will have an economy larger than many nations.

Yes, this seems like the epitome of crude nationalism - 'But the giant “American” corporations who control our economy don’t seem to feel the same way. They certainly don’t act like it.

Sure, these companies wave the flag — but they have no loyalty or allegiance to America. Levi’s is an iconic American brand, but the company operates only 2% of its factories here. Dixon Ticonderoga — maker of the famous №2 pencil — has “moved almost all of its pencil production to Mexico and China.” And General Electric recently shut down an industrial engine factory in Wisconsin and shipped the jobs to Canada. The list goes on and on.'

If only she was penning love letters to shark like entities instead.

And to think she (or the people doing the ghost writing) has the temerity to write this - 'R&D investments must be spread across every region of the country, not focused on only a few coastal cities. There are talented Americans in every part of the country, but too often cities and towns experience brain drain and shrink because corporations move jobs and opportunities overseas or to a small handful of American cities. We must allocate R&D funding across the country, to ensure that there are economic opportunities in every region and that funding is targeted at solving regional problems.'

We really manipulate our currencies quite often. Just consiider FDR, he went off gold then back on gold then WW2 price controls then Bretton Woods. That is four times in one generation, record, or about every seven years, the same as China recently.

But, here is a clue. We manipulate out currency at least once a generation, all the time as in 100% of the time historically. In fact, it is the law, by definition in our constitution each new generation is tasked with manipulation. Finance hedges currency manipulation by the US government, a lot of assets stockpiled for the eventual event.

I should mention that the new technology can manipulate the currency about every ten seconds. The new technology always manipulates the currency so it is more accurate then before, it will do this any time is notices accuracy slipping from the currency, no exceptions.

We manipulate our currency "quite often" and "at least once a generation," and your sole example stretches back eight decades to a quasi-socialist who picked gold prices in his pajamas?

Coloonial, then the pre-federal, then Hamilton, then First Bank of US, then Second bank of US then state banks, then gold then greenbacks, then gold, then federal reserve 1.0, then off gold then on gold then federal reserve v2.0 then Bretton Woods, then Nixon shock, then today.

That is 100%, i believe, from 1700 to 2019. We can make it until 2020 as we finish our MMT moment, theu finishing our perfect record.

Why, did you discover something that make 'This time is different'? If so you are the first economist to do it in history, other then the regular fakes.

Try a bit of history, it helps better than delusions.

The Federal Reserve has been manipulating money continuously since 1913, that's why it was created. Government spending would be much lower without fiat money.

"There are smart people everywhere ..." - fauxcahontas

Not in Alabama!

Of course there are many smart people in Alabama - after all, a majority of Alabama voters decided that Roy Moore was not worthy of election to the U.S. Senate.

Though Roy Moore also serves as an example that there are stupid people in Alabama too (who really should not be riding horses to vote - =

You are correct - I was just kidding. :)

No. What you said the first time was right. Alabamans are pretty dumb. Years of genetic drift caused by inbreeding can create significant anti-Flynn effects on the population with huge implications for IQ.

I don't see the value or joy in being insulting to an entire state.

Not being from there, I have to ask - are the Alabamans actually inbred? And genetic drift does not mean what you think it means in this context. It is something that reduces inbreeding, which is why we generally define it as being associated with very close kinship, even though you may have a very homogeneous wider population.

And, if this inbreeding is a concern, do you also recognize it as such in MENA populations and others and, consequently, view them as lower value immigrants?

>Of course President Trump and yes also Elizabeth Warren are the main offenders here.

Well, you possess a deranged hatred for the former, and the latter is an idiot, so coming from you -- this take holds up.

You're so easily triggered, hun. Sit down in the shade for a spell.

The never-Trump Trump haters are kinda funny. I loved Jonah Goldberg's "Suicide of the West" despite his rabid TDS. All the Trump-hate is clearly mood affiliation.

The shockingly crude economic nationalism from Pocahontas sounds pretty good. Too bad for her we already know too much about her. We know she could never handle the presidency - it's too tough for her to handle.

We need a gladiator, and we have him.

Too tough? Trump exudes weakness from every pore. Tough people don't call people names. Tough people don't lie, or offer all possible answers to a question. Tough people don't look for scapegoats. Tough people don't attack the weak. Tough people admit their mistakes and take responsibility for them. Tough people tell the truth, even if they don't have to. Tough people defend the weak.

The schoolyard bully is a paragon of insecurity, more or less the opposite of tough.

And yet ... results.

"Of course President Trump and yes also Elizabeth Warren are the main offenders here."

Crony Capitalism is insidious, and manipulation of the government is its modus.. It's a swamp with many faces, but nationalism is perfect since it becomes patriotic to support the current list of private companies. The solution is less government, but also effective government. A natural policy for such an approach is a means tested basic income, that targets poverty by giving people without money some money. As soon as you start directing money here and there to solve a problem it will be captured by private interests in one form or another, become less effective, and have the government agency and particular private companies develop a mutually beneficial arrangement at the taxpayers's expense. We must, in reality, support such a system since it keeps rolling along election after election. Trump is perfect for this system since he unleashes an avalanche of bullshit just by nature leaving everyone perplexed about where he's headed. Warren's menu is bad news as it offers a smorgasbord for crony capitalists to feast on. Calling all crony capitalists, supper's ready.

"It’s not a question of more government or less government. It’s about who government works for."

It is a question of less or more, as well as who. Less and simpler are generally better, although, yes, sometimes more is really needed, but, please, let's not make it the default position.

No, since 2005 the value of the yuan had NOT risen considerably. It has strengthened from 8.4 Y/D to a peak of 6.0 Y/D and has since weakened to 6.7 Y/D.

This is nowhere near the 1.5 to 2 Y/D in the 70s and early 80s.

Back when those exchange rates were closer to parity, China bought almost no US treasuries and our trade and trade deficit with them was small. They simply had nothing that we wanted.

It's interesting how Tyler is criticizing these sorts of policies now that they're coming from Warren. He was quite muted when it was just Trump talking about these policies. Presumably it's because Warren has also talked about higher taxes, particularly the wealth tax.

You obviously weren't paying attention. He did criticize them, vociferously and frequently.

I heard something about how democrats are evil, but they can't predict Republican maneuvers. Here Tyler is being considerate but he cannot subjugate the thing itself. America can carry a debt and Americans can live in fiscal neutrality because interest in American federalism is so high. See FB growth. So why does China manipulate its currency? It's artistic....

"it is shocking in its crude nationalism"

Trump's crude nationalism has worked extremely well for him, how can it be shocking when others learn from his successes? Do you mean that it is merely #shocking or am I missing something?
I would also suggest that Warren be allowed a Straussian reading.

"Worked very well for him?" How? His poll ratings are way underwater, despite the economy largely doing pretty well so far, although the Fed being open to cutting interest rates is heavily driven by slowing global growth the Fed attributes partly to Trump's trade war. So, getting the Fed to cut interest rates to offset slowing global growth due to his "crude nationalism" is a big win?

His poll ratings were terrible before he was elected, even on the day before the election.

The problem is pretending we can avoid manipulating our currency, we cannot. For those of us with infinitely lived philosophies I might remind you, we die and the Right to coin remains. The millennials have no choice in the matter, they will execute the traditional American generation manipulation of the currency. I might also mention that we have an extensive hedging system that helps wealth prepare for the periodic even, and wealth is ready to play the game.
It is happening, it is a delusion to think it is not. It is the Null hypothesis, it is the mathematical definition of central banking, a provable event.

I thought people bought on price...

The Economist is saying the White House is simultaneously pro and contra manipulation.

Quote from the 2019 June 22 dated article...

"President Donald Trump took to Twitter to denounce Mr Draghi for “unfair” currency manipulation. Earlier this month Steven Mnuchin, Mr Trump’s Treasury secretary, had fired a warning shot in the direction of Beijing on currency policy. If China stopped trying to support the yuan, he seemed to suggest, that could be understood as an effort to weaken it."

Second, up through the late 1990s, Chinese currency manipulation consisted of keeping the value of the currency “too high” rather than “too low.” Yet in those earlier times, Chinese exporters still were gaining ground.

Chinese exports post 90s can't have been boosted by yuan manipulation because yuan was artificially inflated during the 90s? Does that follow?

Finally, countries with low household savings rates tend to run trade deficits, and of course that is the U.S., with savings rates usually below 10% and often as low as 4%.

How much is the distribution of national net trade deficits internationally directly driven by increased spending of savings and a proportional amount going to imports? I would guess not much.

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