dimarts, 23 de març de 2010

Who is right?

"The broader principle here is that there are two basic approaches to monetary policy. One is the "hard money" approach, and the other is the "soft money" approach.

The hard money advocates want the most stable, predictable currency possible. When the currency is stable, it is easier to do business, and business thrives.

The soft money advocates try to fix this or that economic problem with currency manipulation. Whether to address a recession and unemployment, or for export competitiveness, or for some perceived "trade imbalance," their solution always involves some sort of monetary manipulation.

From the standpoint of the soft money advocates, a stable, fixed currency is an anathema. Obviously, if the currency is stable and predictable, then it can't be manipulated to fit the soft money advocates' short-term objectives. The soft money advocates want floating currencies, managed by a "policy board."

You have no idea how old these ideas are. Plato was a soft-money guy, but his student Aristotle was a hard-money advocate. No kidding.

We can also see here that soft money is plainly a "statist" solution, enacted by a central government bureaucracy. Hard money is a "capitalist" or "libertarian" solution, in which the government simply ensures that the currency is as stable as possible, and lets businesses act freely within that framework. That is why the United States, which upon its inception in 1789 was by far the most "libertarian" major government on the face of the earth, also mandated a strict gold standard in the Constitution.

From this description, we can easily see that China has a hard money policy - a dollar peg dating from 1995 - and the United States has a soft money policy.

Thus, it is completely absurd to accuse China of "currency manipulation." China has a policy of no currency manipulation - a hard dollar peg. The U.S. has a policy of continuous currency manipulation. China's hard-money policy is coming into conflict with the U.S. government's soft-money ambitions.

Like any soft-money advocate down through the centuries, the U.S. government wants to achieve certain policy goals by way of currency manipulation. It's the same litany: to lessen the domestic effects of recession, to generate a trade advantage versus China, and to resolve some perceived "current account imbalance."

We can also see, by way of this recent conflict, how the U.S.'s academic establishment has devoted itself completely to soft-money principles.

Unfortunately, you can't create wealth by jiggering the currency. People have tried to do this for hundreds of years, with no success. The hard-money advocates are right - the best foundation for long-term prosperity is a stable currency.

Just look at the situation today. Which country is on the path to long-term prosperity? China or the U.S.? Which government tries to solve its problems with currency manipulation, and which government instead tries to address the real underlying issues?

Isn't it obvious?"

Thus it was in past generations as well. The United States used to be the world's greatest champion of hard money principles, until the money manipulators became ascendant around 1971. During that great stretch on the gold standard, from 1789 to 1971, the U.S. became the world's most successful industrial power, and had the wealthiest middle class in all of history.

Nathan Lewis, The Huffington Post. China versus U.S.: clashing monetary paradigms.

2007, March. 1Km. taxi ride in Beijing = 10 RMB (€0.9)
2010, March. 1 Km. taxi ride in Beijing = 10 RMB (€1.1)

Tony Studio:
2007, March 23rd. Haircut + Illy Expresso + massage = 180 RMB (€17.6)
2010, March 23rd. Haircut + Illy Expresso + massage = 180 RMB (€20.06)

Today, the RMB is 14% more expensive than 3 years ago. But in these 3 years, the Chinese GDP has grown a 34.5%, from 24.9 to 33.5 trillion yuan.

Who's right?

(Sources: Iceberg Center for Intelligence Studies (ICIS), X-rates, National People's Congress, China Statistics Bureau.)