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My New Hero

I just noticed Peter Schiff has a blog on the Campaign for Liberty site and he is saying many of the same things I am (and often in more elegant ways).  Here he sums up the spirit of my post “Maybe it’s an Art After All” in one concise paragraph.

The effect of current Chinese currency policy (which, despite Beijing’s protests to the contrary, is manipulation pure and simple) is to make the U.S. dollar more valuable and the yuan less valuable. As a result, the benefits of manipulation accrue to Americans, not the Chinese. We get pay raises; they get pay cuts. Americans use their stronger dollars to buy products they would otherwise not have been able to afford. On the flip side, the Chinese people do without products that they otherwise would have been able to afford had their government not transferred their purchasing power to us.

Schiff goes on to express his concern at the fact that nobody, including the Chinese, seems to understand this.  Now as a guy who talks to macroeconomists, I can tell you that this hypothesis is not that far-fetched.  But it’s not the only explanation for the current situation.  Economists tend to make a lot of assumptions without noticing them.  One assumption that is common and probably flimsy at best is that the motivations of government are aligned in some way with the interests of their citizens.  If we believe this assumption with respect to China, ignorance is the only explanation for their monetary policy since their people are certainly the losers in the deal.  If, on the other hand, we imagine that the Chinese government has other motivations like, for instance, becoming the world’s new economic and political super-power, then this policy might be ingenious, not because it helps their economy but because it puts them in the position to dynamite the US economy whenever they feel like it (and to do so by reluctantly giving into our demand no less). 

I don’t know what their motivation really is.  Maybe they don’t realize they are making bad economic decisions.  Maybe they are after a pound of American flesh.  But one thing is for sure either way.  For us to act like they need our market is like Antonio saying to Shylock  “I’ve got you right where I want you.”

Also, this post is excellent.

He neglects to mention that during the five years from 1945 to 1949, federal spending dropped by 58% and taxes fell by 12%. Meanwhile, the budget deficit fell by 66% in 1946 and was in surplus from 1947 to 1949. [i] In other words, although we did not pay down our nominal debt in the decade after the war, we did succeed in massively shrinking government and the burden that it places on society. Could it be that this had something to do with the post-war boom, or should we give all the credit to the monetary policy? (It is important to point out that our national debt did initially decline from 1945 to 1949, but the extra spending necessary to finance the Korean War reversed that trend.)

Contrary to the standard progressive (Keynesian) account taught in history class of the massive government spending during WWII bringing us out of the depression, or the more nuanced neo-Keynesian/monetarist theory that it’s all due to monetary policy, the case for a property rights explanation presents itself quite clearly.  By all accounts that I have seen, the standard of living during the war wasn’t particularly high despite inflated “output” (GDP).  How excited are you that the country is producing a lot of equipment that is getting blown up in Europe and the Pacific while at home, common things like gas, rubber, and silk are rationed and you have to grow your lunch in your back yard?  Spending doesn’t make us rich as Keynesians would have us believe.  We only started to experienced prosperity after the government got out of the way.

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