Currency: The End of The Discussion With China

Last week’s G-20 meeting in Seoul, South Korea was intended to be the venue where President Barack Obama would turn up the heat on China to revalue its currency against the dollar. That’s not exactly what happened.

In advance of the meeting, the Federal Reserve announced that it would buy $600 billion of Treasuries to spur the growth of the U.S. economy. In an opinion piece for the Washington Post, Fed Chairman Ben Bernanke said the purchases should boost economic growth through lower borrowing costs and higher stock prices and that concerns about the strategy are “overstated.”

Reaction from around the world was instantaneous—and universally negative.

“What the U.S. accuses China of doing, the U.S.A. is doing by different means,” the German finance minister, Wolfgang Schäuble, said of the Fed’s new decision. Earlier, the Brazilian finance minister, Guido Mantega, who has warned of a global currency war, predicted that the Fed’s move would be ineffective, saying, “Throwing money out of a helicopter doesn’t do any good.”

Reaction at home has been mixed, with leading Fed scholars voicing skepticism about the Fed’s latest step, which even Fed officials acknowledge will have only modest effects on employment and growth.

“Learning is slow when you need it most,” said Charles W. Calomiris, an economist at Columbia Business School who presented research on the Fed’s policy mistakes from its founding until 1951, most notably during the Depression. “Volatile times make learning and accountability much harder, because views that might be false are harder to discredit.”

Mr. Calomiris said he would “make a strong case” against additional purchases of government debt, and added: “When we need central banks to act the wisest, they often act the least wise.”

Other economists expressed ambivalence about the Fed’s latest step. “They’re setting the stage for an outbreak of real serious inflation one to two years from now, at which point they will have no choice but to sell securities and raise interest rates, which will reduce the value of their assets and consequently their earnings,” said William F. Ford, a former president of the Atlanta Fed.

The Fed’s move enabled China to take the moral high ground on the currency issue in Seoul. At the meeting of the G-20, Chinese officials reminded Americans that as the issuers of the dollar, the main global reserve currency, they should consider the interests of the “global economy’’ and their own “national circumstances.’’

President Obama’s meeting with China’s President, Hu Jintao, appeared to do little to break down Chinese resistance to accepting even nonbinding numerical targets for limiting China’s trade surplus, as suggested by Treasury Secretary Timothy Geithner at the meeting of G-20 finance ministers several weeks earlier.

The combination of the Fed’s decision and the Democratic defeat at the polls on November 3 essentially ended any leverage the Obama Administration might have had with China on the currency issue. The leaders of other major economies are now on China’s side in the currency debate, and with a Republican majority in the House of Representatives, Chinese leaders know that the impetus for protectionist trade measures has now receded.

Expect China to continue its policy of a gradual appreciation of the renminbi against the dollar, and the decibel level of the rhetoric from the Obama administration on the value of the renminbi to be substantially reduced in the months ahead. For all intents and purposes, the currency issue is now off the table as far as a serious discussion point between the United States and China.

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