"Gary Coffman" wrote in message
...
On Fri, 21 Nov 2003 06:29:11 GMT, "Ed Huntress"
wrote:
I've got to cut this long-winded discussion short, which risks screwing
it
up completely, but here's the most important final point. Since the
1970's,
there has been no way for the US, or any other developed economy, to wind
up
with inflated values because its workers or industries are "spoiled".
Since
currencies were cut free of gold and silver standards, and since they
were
allowed to float free on world markets, it has been those currency
markets
that determine relative value. If the US economy, overall, was puffed-up
by
wishful thinking or greed, the currency markets would cut it down to size
in
about 15 minutes. So your set of relative values, which all of us share
to
some degree deep inside, and which we might call the "high-school civics
class system of valuation" g, is utterly shot to pieces on the world
currencies markets. They don't care what your idea of value is. They only
care what the market thinks value is. And they think that our wages,
relative to our production, are just about right. We won't know what they
think about China unless and until China cuts its currency loose to float
and to be traded freely on world markets.

Well, economists are saying that the yuan is about 30% overvalued.
So if it were allowed to float free, a Chinese machinist would have to
be paid the equivalent of $1.30 an hour instead of $1.00 an hour to
make the same amount he is now making. That's still far below the
$15 an hour a US machinist demands.

Nobody knows what would happen to the yuan if it were to float. The 40%
figure we hear so often came from a US Congressional commission that was
evaluating China's military threat to the US. Some economists have said the
real figure is 20%. Andy Xie, an highly respected economist based in Asia
who works for Morgan Stanley, says it could be that the yuan is actually
overvalued. Hamei said last year that the black market for yuan was slightly
over 9 to the dollar, which indicates that it's overvalued.

US Congressmen and the US press have been using the 40% figure, passing it
around without knowing where it actually came from, for the most part.

What matters to the Chinese is the rate at which they can accumulate foreign
reserves. That's how they've set their rate.

In any case, your underlying point that a revaluation wouldn't do much to
improve our trade situation certainly is true, as I also said in one of my
articles for Machining about China trade.

The trouble with the fixed exchange rate, for us, is that nothing we can do
to improve our own productivity, and no adjustment of the value of the US
dollar, will work to level our trade situation with China as long as they
have their rate pegged to ours. Improving our productivity will only raise
the value of the dollar while China's edge in trade will remain unchanged;
running an excessively negative current account balance that will reduce the
value of the dollar will result in theirs going down along with ours, which
they won't care about one way or the other.

It's a very distorting thing, in other words, although not for the reason
that Phil English (R-PA) and some other Congressmen are claiming.

Ed Huntress