China currency bill is about US politics, not trade

Below is a video of my appearance on RT International last night discussing the recent bill to authorise sanctions against the Chinese for currency manipulation. I see this bill as all about the politics and little about the economics.

Protectionism is always the fall back when the going gets tough. As I predicted over three years ago, this was always going to be a preferred political solution for some when this downturn dragged on:

The global economy, now supported in the main only by the overextended U.S. consumer, finds itself at stall speed, susceptible to any number of potential exogenous shocks. Ultimately, the economic malaise created by this confluence of events will take years to unwind. A positive outcome to this process is dependent wholly on liquidation of excess credit and consumption.

This process will be extremely painful in the short term, but will lead to a healthy economy long-term. Unfortunately, experience shows that these painful steps will only be taken as a last resort. Moreover, geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. Protectionism is a natural outgrowth of nationalist economic policy as it transfers wealth from foreign producers to domestic producers by cutting off access to lower cost excess capacity in the goods in service sectors. However, this also serves to transfer wealth from domestic consumers to domestic producers by increasing the price of goods in the protected sectors, ultimately reducing consumption demand.

Notice that basic economics tells you protectionism makes goods more expensive, not less expensive. How does this help the economy again?

What’s more is the US has a trade imbalance with 90 countries, a greater trade imbalance with the rest of the world ex China than with China.

Scott Sumner rightly points out:

the Germanic/Nordic current account surplus is vastly larger, despite the fact that the countries lying between Switzerland and Norway have a combined population only a tenth as large as China’s. The smaller East Asian countries also have vastly bigger surpluses on a per capita basis. So why focus on China?

The answer: the political economy of depression. The trade deficit is not about China, it is about the US and its desire to return to an asset-based economy of over-consumption and excess credit growth. And because the US has failed to do so within the time frame that allows for political re-election, targets for blame must be manufactured. China is really the bad guy then.

The cure to what ails America is private sector savings. This is exactly why stimulus is no panacea. It is the lack of household savings that creates the trade imbalance. The true twin of America’s current account deficit is not a government deficit but rather it is the household financial balance. As the savings rate in the US has dropped, so has the trade deficit increased. And of course, this should make sense as most of the trade deficit comes from tradable consumption goods.

You are not going to increase household sector savings by either (a) keeping interest rates at zero percent for “an extended period” or (b) by diverting all of the private sector savings into the corporate sector or (c) allowing all of the income gains to flow to the top while reducing domestic median wages and employment. These are the hallmarks of banana republics and point to a well-entrenched level of corporatism.