Rossputin.com Rational Thinking About Our World

I was going to write a note about how boneheaded the Senate’s attack on China (pushing to have them labeled as a “currency manipulator") is, but Michael Schumah has done such a good job that I’ll simply point you to his piece and add a couple more comments.

Schumah’s article: Pressing China on the Yuan Won’t Work

Please read it…it’s an excellent intellectual immunization against the siren-like call of economic ignoramuses.

I would also add that China’s policy causes them to accumulate dollars, with which they have been massive buyers of US government debt.  Some people worry about that giving China leverage over the US but I doubt that.  Debt holders are not voters, whether in international economics or in standard corporate finance.  Beyond the debt, we’ve learned recently that China is buying equity stakes (stock) in US companies.  Combined, China’s trade surplus with the US is giving them more reason than ever to support American economic success.  The argument that China will damage the US if they don’t get their way is like saying they’d be willing to incinerate billions of dollars.  If there’s one thing we’ve learned about Communist China, it’s that they’re more capitalist and more fiscally disciplined than our own government, at least over the past several years – including most of George W. Bush’s second term. And that’s all on top of the 800-pound gorilla of China needing the US export market to keep Chinese workers employed and prevent social unrest, something they fear greatly.

One of the main impacts of China’s debt purchases has been to keep long-term interest rates very low.  While one can make a legitimate case that long-term bonds have largely because of China been in their own bubble (prices up, rates down) and that the bubble was a cause of the real estate bubble and ensuing economic collapse, at this point it’s clear that the economy and the real estate market would be in even worse shape if long-term rates were higher.

If there’s anything the global economy can’t handle now, it’s a trade war between the US and China.  Our politicians are just stupid enough to lead us into one, though I predict they’ll back off before that happens.

As if the arguments against the Senators’ move isn’t enough, the list of Senators behind it should give anyone with the slightest clue about political economy grave doubts about the thinking behind this attack on China:

Charles E. Schumer (D-NY), Lindsey Graham (R-SC), Debbie Stabenow (D-MI), Sam Brownback (R-KS), Sherrod Brown (D-OH), Olympia Snowe (R-ME), Evan Bayh (D-IN), Ben Cardin (D-MD), Robert Casey (D-PA), Russ Feingold (D-WI), Kirsten Gillibrand (D-NY), Carl Levin (D-MI), Jim Webb (D-VA), and Arlen Specter (D-PA).

Have you ever seen a more complete list of econo-morons and RINOs?  (It could only be more complete if it included John McCain, though McCain isn’t too bad on free trade most of the time.)

Update: Morgan Stanley’s excellent economist Stephen Roach also takes on the poorly-conceived attack on China, this time by the worst economist in the nation, Paul “My view depends on who the president is” Krugman.