The Chimerica Currency Game


It wouldn't be out of place in Vaudeville: China's premier slaps the U.S. Treasury over weak debt performance, then the Treasury tweaks China's nose by allowing the "currency manipulator" letter to gain traction.

Both accusations are right, but it's these sort of economic shenanigans that have allowed a favored few on both ends of the Pacific to profit from China's trade surplus. Ironically, the Treasury and China are money-making partners.

China's Yuan peg has helped it maintain favorable exchange rates with developed countries. Manufacturers build in China and export their products abroad. The profits from this can only be realized as long as Chinese production plus transport costs are less than U.S. production costs.

So it's in China's interests to have the value of the dollar stay high and the value of the Yuan stay low.

U.S. production costs are measured in dollars. In the United States, we control the value of the dollar by buying and selling government debt. The Treasury and the Federal Reserve have been running a very inflationary monetary policy for almost a decade. It's so bad that the Fed stopped reporting our total money supply in 2006.

Our massive government debt issuance has lead to a problem: how do we maintain the value of our currency? The profits from lending to Washington can only be realized as long as somebody is willing to buy the debt.

So it's in the Treasury's interest to have an inexhaustible buyer of U.S. currency -- er, debt. China has been the latest "trading partner" to step up to the plate. China makes, America buys; America prints, China buys.

This elegant quid pro quo is made possible through cooperation between U.S. and Chinese government officials and the banks that extend them credit.

These are the same banks which control U.S. monetary policy via their influence at the Federal Reserve; and which are also voraciously expanding into China. We shouldn't assume Henry Paulson's business interests have left the White House with him. Little has changed in Beijing either.

The squabbling between Wen Jiabao and Tim Geithner should be seen for exactly what it is: squabbling amongst gangsters. Perhaps China fears that the Obama administration will not be sophisticated enough to keep up their end of the business deal? The most likely result is that both parties will stop rocking the boat and get back to leaching off their respective constituents.