Saving the Global Economy: Try a Dollar Peg to the Renminbi

Prof. Reuven Brenner of McGill University and I offer a solution to the global economic crisis. This article in the National Post was condensed from a longer essay in First Things. An extract:

U.S. should install fixed dollar parity with the renminbi

By Reuven Brenner
and David P. Goldman

As U.S. President Barack Obama prepares for his China visit, China and other Asian countries are under pressure to let their currencies float upwards against the dollar, amid extreme financial uncertainty and the disturbing prospect of political tensions. This is the wrong way to do things. The Sino-American currency relationship is certainly critical to any prospective recovery of the world economy, but we need a new, more revolutionary, approach.

Despite its recent financial woes, the U.S. remains the only actor on the world stage that can break down the barriers impeding the natural flow of capital around the world. These barriers are global, and have a dramatic impact on the destinies of not only the aging and affluent people of the West but also the young but impoverished people of the developing world, including China. These destinies are joined by a very simple economic fact: The old tend to have savings, while the young tend to have energy. To fund their retirements, old people must find young people to whom they can lend. And to start families and businesses, young people must find old people from whom they can borrow.

With the continued rise in American unemployment, despite nearly a trillion dollars in stimulus and over eight trillion dollars in federal subsidies and guarantees to the financial system, this co-dependency should be glaringly obvious. Americans, at the cusp of the biggest retirement wave in their history, must save as they never have before, particularly after the wealth destruction of the past two years.

Two decisive actions would help open the floodgates that separate the capital-thirsty developing world from the capital-rich savers of the West. We need, first, monetary policy to stabilize currencies (currencies of developing nations, in particular) while creating conditions for the rapid development of their domestic capital markets. And we need fiscal and regulatory changes to encourage savings and investment in the United States.

Rather than exporting and saving, America is vacuuming capital out of the rest of the world and going further into debt. Once we exclude the option of admitting a few million skilled, entrepreneurial young immigrants — as Israel did from Russia two decades ago — the present crisis can be solved only by opening the world to American exports and restructuring the American economy to create the necessary export capacity.

The greatest crisis the present administration faces is the collapse of the dollar and its role as the world’s main reserve currency. Paradoxically, preventing the dollar’s collapse also represents a once-in-a-century opportunity for American leadership. U.S. fiscal and monetary policies degrade the dollar’s value and force part of the burden of financing a misguided fiscal stimulus on America’s trading partners.

The United States should instead establish a fixed parity for the dollar with the currencies of its largest trading partners, starting with China. By stabilizing the dollar against the renminbi and, eventually, other currencies, the United States can create a shield behind which the capital markets of developing countries could flourish and capital continue to flow to the United States.

Comments

[Crocodilian:]

"Despite its recent financial woes, the U.S. remains the only actor on the world stage that can break down the barriers impeding the natural flow of capital around the world."
----------------------...

It is hard to see what leverage the US has to do this. We are a major debtor, facing very large continuing financing needs; this is not a position of strength.

"And we need fiscal and regulatory changes to encourage savings and investment in the United States."

The savings rate in the US has increased dramatically in the last 18 months. It has gone from negative, to positive %5-7. That's a dramatic change.

"The United States should instead establish a fixed parity for the dollar with the currencies of its largest trading partners, starting with China."

China sets the dollar renminbi rate, not us. They're sitting on about $2 Trillion in US$. We're sitting on essentially zero Renminbi reserves (the Renminbi can't be held outside of China). Exactly _how_ can we execute a Renminbi peg when we have no Renminbi to sell?

Nov 16 04:36 AM

[Davewmart:]

'The old tend to have savings, while the young tend to have energy. To fund their retirements, old people must find young people to whom they can lend. And to start families and businesses, young people must find old people from whom they can borrow.'

So why do current capital flows go in the reverse direction?
The money is going from young China and Asia to old Europe and the US

Nov 16 05:08 AM

[Andrew Butter:]

Re: Once we exclude the option of admitting a few million skilled, entrepreneurial young immigrants — as Israel did from Russia two decades ago — the present crisis can be solved only by opening the world to American exports and restructuring the American economy to create the necessary export capacity

Right on the button.

Question: Why not?

Nov 16 05:42 AM

[Moon Kil Woong:]

Yes parity with the Reminb where it is 50-100% higher would be fine and great. The problem is how to convince China to do this and how to get the US to stomach the inflation caused by the normalization of currencies.

Like most economic disparities, a collapse is neccesary to reset things straight. The problem is we got the collapse but the power that be don't want a reset (because it is essentially the same as an austerity program). Thus we are stuck in an eternal cycle of collapses caused by the continuation of a badly out of whack economic relationship demanding the US to overconsume and bleed itself dry in exchange for low inflation.

Nov 16 05:51 AM

[test213:]

The US dollar falling for a while now has raised concerns all over Asia, as the reminibi (pegged to the dollar) is also weaker against their currencies.

Asian countries will push for a higher dollar, it is in their interest.

test 213
admin at invetrics.com

Nov 16 07:10 AM

[Tetrapod:]

Thanks for the article.
I like the idea, and believe we are currently pursuing an equivalent solution to the problem.
China values jobs over wealth, and thus far, the US has been willing to allow China to steal our core manufacturing jobs using their artificially suppressed Yuan. These are the jobs that enable movement into the middle class.
I think that our two governments are currently engaged in a big game of Chicken (see seekingalpha.com/user/... The US is intentionally weakening the Dollar, to try to break China's peg. China refuses to relinquish their death-grip. Sure, a badly weakened dollar will hurt the US, but it will hurt Beijing even more, as they are forced to buy more and more weakening dollars to keep their currency artificially low. The ones who are getting hurt the most are Europe and Japan, as their currencies are being forced up to unsustainable levels.
Until either Washington or Beijing relent, it's going to be a very ugly, but necessary contest. I believe we have the upper hand on this one, as we can print money faster than China can buy it all, and if China dumps the dollar, it hurts them more than us.

Nov 16 08:51 AM

[Davewmart:]

Moon Kil Woong said:
'The problem is how to convince China to do this and how to get the US to stomach the inflation caused by the normalization of currencies. '

Maybe it's nitpicking, but the adjustment needed does not necessarily lead to inflation.
In one way or another the US, UK etc need to consume less and inflatrion without corresponding price rises would be one way to do this.
The other way, and the one I suspect we will end up with, is a massive deflation with asset prices and wages falling even faster than prices.
Stoneleigh on 'The Automatic Earth' argues that the deflationary forces will overwhem even the ability of Governments to print money - you can't force people to spend, and Governement stimuli will be forced to end by the credti rating being trashed and interest rates rising.
Massive unemployment, abandonment of expensive houses and a move to renting will also trash house values, leading to defaults in the banks who have exceeded the ability of Governments to support them.
So a deflationary collapse, perhaps followed later by hyperinflation, seems on the cards.

Nov 16 09:36 AM

[Billy the w...:]

The reason other world governments are not openly complaining about China's yuan policy is because they know who the winner will be from this poker hand. America vs China. Everyone's lent money to the the player who is all in, so they pray he comes out whole. Yet the heavy odds go with the player who still has a mountain of chips on the side. So, everyone holds their breath. I can see how this game of chicken plays out. It will lead to some country suddenly dumping dollars and snowballing into oil and commodities being priced in anything other than dollars.

Nov 16 10:09 AM

[Thomas J. G...:]

Andrew Butter, I am a free market person for most things. But on immigration I equivocate. If we opened u.s. borders I think people from places that have less the rule of law would flood in. I don't want that for crowding and environmental reasons. When I grew up there was a 2 lane road from L.A. to San Diego. The u.s. has had plenty of growth and we will have more growth. But I would like to keep the natural beauty we have here in the u.s. from being overwhelmed.

Nov 16 03:15 PM

[Mad Hedge F...:]

vhu I have long sat beside the table of Mckinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director Dominic Barton when he passed through San Francisco visiting clients. These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up, sadly letting my bacon and eggs grow cold and congeal. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China’s GDP will triple relative to our own from current levels. A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this doesn’t work, they have another $500 billion package sitting on the shelf. But with GDP of only $4.3 trillion today, don’t count on China bailing out our $14.4 trillion economy. China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC’s, and to live in big cities. Asia has a huge edge over the West with a very pro growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75 story skyscraper is going up there every three hours! Some 1,000 years ago, the Silk Road was the world’s major trade route, and today intra Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths. Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth. To me this all adds up to big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

Nov 16 05:36 PM

[perki's:]

"China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC’s, and to live in big cities"

Yes, but -- where will the wealth be created to move 900 million people to the middle class? China's export growth to the west will flatten. Ditto for India and others.

Who will be the "customer" for the huge volume of exports needed for China to continue its growth?

China's wealth comes from exports, without growth in exports there is no long term growth in internal consumption. They need an elephant of a new customer, what country will that be?

Nov 17 09:34 AM

[coreopsis:]

Typical yobbish nonsense. Some person who thinks they can write in English makes a preposterous comment like 'the $/RMB exchange should be this...'

Moon needs an education and I suggest he start by reading. In the book is "The Black Swan" -- you will learn a lot about the fallacy of your predictions about a world in which true experts disagree.

BTW, the Black Swan has a perfect portrait of people like to quantify the unquantifiable and use that prediction as a basis for action. Quite amusing as I'm sure it suits to a T a select number of Moon-like thinkers here.


On Nov 16 05:51 AM Moon Kil Woong wrote:

> Yes parity with the Reminb where it is 50-100% higher would be fine
> and great. The problem is how to convince China to do this and how
> to get the US to stomach the inflation caused by the normalization
> of currencies.
>
> Like most economic disparities, a collapse is neccesary to reset
> things straight. The problem is we got the collapse but the power
> that be don't want a reset (because it is essentially the same as
> an austerity program). Thus we are stuck in an eternal cycle of collapses
> caused by the continuation of a badly out of whack economic relationship
> demanding the US to overconsume and bleed itself dry in exchange
> for low inflation.

Nov 17 10:03 AM

[untrusting ...:]

Andrew,
Sure, we can do that and build US exports. Are you and millions of other Americans willing to work for the $1-2/hour that most third world employees get? Then maybe take off $1/hour from that to account for the extra regulatory, legal, etc burdens in the US that none of these third world countries have.

When your ready to go to work for that net $1/hour and can get another say 100,000 to join you, then we can raise the capital and get some businesses going here. We should have no problem being able to export and keep you employed then.

Just let us know when you are ready.


On Nov 16 05:42 AM Andrew Butter wrote:

> Re: Once we exclude the option of admitting a few million skilled,
> entrepreneurial young immigrants — as Israel did from Russia two
> decades ago — the present crisis can be solved only by opening the
> world to American exports and restructuring the American economy
> to create the necessary export capacity
>
> Right on the button.
>
> Question: Why not?

Nov 17 05:12 PM

[Ben Gee:]

The RMB pegged to the $ or the $ pegged to the RMB is the same thing. If you are trying to confuse people, it worked. If the US continued to consume more than it produce, it will go further into debt. No amount of rates of exchange will change that. As during 2005-2008, when the RMB went up by 21%, the US deficite went up by a similar amount, and Chinese surplus went up the same amount.

Nov 18 01:40 AM