Banning Imports Will Not Solve Vietnam's Problems

Inflation is soaring in Vietnam. The cure is simple. All Vietnam has to do is stop the expansion of money and credit. Vietnam is instead looking at trade deficits and gold.

Voice of America is reporting Inflation, Trade Deficit Cause Worry in Vietnam.

Just a few months ago, Vietnam was touted as the new China, with its fast-growing economy drawing billions of dollars in foreign investment. But then came an inflation problem that seems to have gotten out of control. Now the government is wrestling with a slew of problems that threaten to knock the country's economic success off the rails. Matt Steinglass reports from Hanoi.

Vietnam's trade deficit shot up to $14 billion in the first five months of 2008, from $11 billion for all of last year. The influx of foreign currency puts pressure on the Vietnamese dong to strengthen.

But that would make Vietnamese exports more expensive, hurting local industries. So the government held down the exchange rate by buying dollars with dong, which inflated the supply of dong, contributing to inflation.

My Comment: This is exactly what China is doing as well. Bernanke calls this a "savings glut". Printing "Yuan" to buy dollars is no more savings than printing "đồng" to buy dollars. I discussed this many times, most recently in Bernanke Blames Saving Glut For Housing Bubble.

Peter Ryder, head of the investment group Indochina Capital, says that reassured investors, but perhaps not enough.

"The big, big issue in my mind is, are they going to be able to get away with just gradually devaluing the currency, is that the best thing to do? Or should they just kind of go 'whack'? Just do [devalue by] 20 percent at one time? Or are they just going to kind of let the air out of the tire [slowly devalue the currency]?"

Analysts at the investment banks Merrill Lynch, Deutsche Bank, and Morgan Stanley have warned that unless the government raises interest rates, devalues the dong, shuts down insolvent banks, and cuts government spending, it could face a currency crisis.

My comment: Vietnam is attempting to grow its export business. It "succeeded", using the term loosely. Now it is facing the consequences. The list of recommendations is ironic. The US needs to do the same, most notably shutting down insolvent banks and cutting government spending.

Vietnam Suspends Gold Imports

Rather than do what needs to be done, politicians instead always try something 100% guaranteed not to work, such as this: Vietnam suspends gold imports in move to ease growing trade deficit.

Vietnam's communist authorities have temporarily suspended all gold imports in a bid to tackle the country's spiralling trade deficit and help support the depreciating local currency, the dong.

With Vietnamese investors rushing into gold as a hedge against skyrocketing inflation, Hanoi - which sets an annual quota for gold imports - has withdrawn licences for further imports, traders said yesterday.

The decision comes as record imports of gold bars have made Vietnam the world's biggest market for gold bullion, surpassing India and China and helping to deepen Vietnam's trade deficit.

"We've seen high demand as Vietnamese investors have taken a rational decision that this is a hedge against higher inflation, and a weak dollar," said John Shrimpton, a director at Dragon Capital, a Ho Chi Minh City-based boutique investment bank.

Hedge against a weak Dollar or a weak đồng?

If a devaluation is coming, the last thing one would want to hold is the đồng. In the final analysis, the đồng, the yaun (renminbi), the dollar, and even the Euro are all dung. The only difference is the speed at which that realization will come. It is perfectly rational for demand for gold to rise in Vietnam. Banning imports will do nothing to solve the underlying problem.

Comments

[mdmrjsds:]

I agree with you, but have a slightly different interpretation.

China and Viet Nam are practicing mercantilism. The trouble with mercantilism is that it views "winning" as having all the production instead of having all the consumption. It assumes economics is a zero sum game and trade should only flow one way. So what is happening here is they are debasing their currencies so that they can continue to play the game they want to win (the wrong game, in my opinion). What they should be doing is allowing their currencies to float as the US $ declines. This increases their domestic consumption capability and allows them to displace exports with internal consumption. By doing this, they don't lose growth and they don't devalue their currency. It also creates social stability. If the pendulum swings too far to domestic consumption, their currency devalues and they can't consume as much. That is, this is a negative feedback loop, so it is self correcting.

This is what should be happening to the US, (actually should have happened over the past 20 years or so). Unfortunately, our status as the world's reserve currency doesn't allow this to happen, and so allows us to consume beyond our means. Thus our huge deficits without any immediate economic repercussions.

Our response seems to be to devalue our currency rather than reduce consumption. Politically easy, but dire consequences down stream. It seems the art of politics today is to push problems into the future by borrowing from the future. Maybe it always has been. If you want to know who's to blame, all you have to do is realize that we elect the politicians, so collectively, we are. We too would rather push the problems into the future.

I suspect Rome was like this in the time of the decline.

2008 Jun 26 12:25 PM

[moonbat1775:]

There was an American named Denning who went to Japan and taught the Japanese about quality control. The Japanese then proceeded to produce high quality cars which embarrassed the American car makers into doing the same.

Since Ron Paul is not getting the respect he deserves in the US perhaps he could help the Vietnamese with regard to an honest and sensible monetary policy. What ironic justice that would be!

2008 Jun 28 05:51 PM

[UserThunder...:]

I agree with the author's diagnosis of the problem, not the solution.

Mar 02 01:26 PM