The threat of a currency war could be an unnoticed factor in the recent U.S. stock market plunge. A much slower China economy would take a percentage point or two off U.S. economic growth, especially in areas like commodities, cyclical industries, tech, transportation, shipping, and trucking. These are the exact market sectors that are getting hammered on Wall Street.
Have the U.S. Treasury, the G-7, and the IMF forgotten the recent history of misbegotten currency manipulation? When several Asian currencies were forced to de-link from the U.S. dollar in the 1990s, world deflation followed. Floating exchange rates were a big mistake then, and could be a big mistake now.
Treasury man John Snow insists on floating rates worldwide, but he forgets that emerging-country currencies don?t float -- they sink. Aren?t we yet persuaded that nations cannot devalue their way to prosperity? Or that currency stability is better than currency chaos?
China, remember, has a shaky banking system plagued with bad state-sponsored loans made to failing nationalized companies. A floating yuan might rise in the short run, but it could crash in the medium term as foreign investors withdraw their capital flows for fear of instability.
Fortunately, when Secretary of State Condoleezza Rice visited China recently, she avoided any mention of forcing a currency change. But John Snow, encouraged by Republicans, keeps pressing the unpopular point. Where?s the policy coordination inside the U.S. government?
Protectionist pressure on the Chinese is also rising. A trade-opening textile agreement has resulted in a temporary burst of Chinese clothing exports to the U.S. American clothing makers have had years to prepare for this, but instead they?re suing the U.S. government on so-called ?anti-dumping? grounds. The Chinese government is meanwhile accusing the U.S., and rightly so, of reneging on the free-trade textile deal.
Why is the U.S. threatening economic warfare against China? Currency protection and trade protection not only blunt economic growth, they sour international political relations. If you add in the vexing problem of nuclear proliferation in North Korean and the historic ill-feelings between China and Japan, you?ve got a real geopolitical and economic mess brewing in northeast Asia. With no apparent solution in sight.