NEW! CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Wednesday, February 03, 2010

Obama Vows to Address Yuan Exchange Rate Issue

by Calculated Risk on 2/03/2010 08:47:00 PM

Reuters is quoting President Obama:

"One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our goods are not artificially inflated in price and their goods are artificially deflated in price. That puts us at a huge competitive disadvantage."
Pimco's Paul McCulley listed this as one of the key issues for 2010:
The first issue is the peg between the Chinese yuan and the U.S. dollar, which essentially gives us a one-size-fits-all monetary policy in a very differentiated world. ...
And Professor Krugman wrote about this on Dec 31, 2009: Chinese New Year
China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.
My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs.
And Larry Summers mentioned this at Davos, see Gideon Rachman's piece in the Financial Times: How the bottom fell out of 'old' Davos
Larry Summers ... pointed out that Paul Samuelson, a famous economist (and uncle of Mr Summers), had argued that the case for free trade might not apply when countries were trading with nations that were pursuing mercantilist policies. The reference to China did not need to be spelled out.
excerpted with permission
Getting the Chinese to revalue (or float) their currency is probably critical to the U.S. achieving Obama's ambitious SOTU goal of doubling U.S. exports in the next five years.