I have said it before and I will say it again, Congress is a rotten, stinking corpse. It is no wonder that it currently has the lowest approval rating of all time. This week more ridiculous legislation was introduced in that body that will only make our lives worse. The bipartisan bill that was introduced would punish any country that practices currency manipulation as an unfair trade subsidy. It would give President Obama the ability to impose retaliatory protectionist measures to level the playing field. Of course, the impetus for the legislation is China’s alleged undervaluing of its currency, the yuan, in order to support Chinese exports to other countries.
Now, it’s funny, how the legislation comes in an election year when there is a very strong anti-incumbent mood amongst the electorate. Many Americans who have lost their jobs in this depression are naturally fixated on statements from Washington dealing with job creation. So as not to disappoint, Democratic Senator Charles Schumer was quoted as saying, “”There is no bigger step that we can take to promote job creation here in the US than to confront Chinese currency manipulation.” This sounds logical on the surface, but upon closer analysis the senator as usual has it all wrong.
In the first place, to even threaten protectionist measures in such a fragile economic environment as we live in is dangerous. The Smoot-Hawley Tariff was passed in 1930 and placed protective tariffs on thousands of imports coming into the United States from abroad. At the time, during the Great Depression, its purpose was to protect American jobs. Sound familiar? Instead, the tariff caused our trading partners to retaliate with tariffs of their own thereby exacerbating an already horrendous employment situation. What makes our politicians believe that China would not retaliate with protective measures of its own or worst yet cause the collapse of our currency by flooding the world markets with hundreds of billions of dollars it keeps in reserve?
But secondly, and much more importantly to our situation, we need inexpensive Chinese products otherwise our inflation rate would be through the roof and unemployment would be right there with it. Here is the vicious cycle of events that is American/Chinese trade relations. China’s products are cheaper because the cost of doing business there is less than in the U.S. Thus, we purchase Chinese goods with dollars and treasury notes. China holds these dollars and interest-bearing bonds in reserve and then prints yuan to pay off the Chinese suppliers of our purchases. When the smoke clears, we get cheap Chinese goods to buy, the Chinese manufacturer makes a profit, and the Chinese government acquires more units of the world’s reserve currency. Everybody wins, right?
If the Obama Administration ends this cycle by imposing protective tariffs on Chinese goods coming into the United States, not only will the Chinese government reciprocate with retaliatory measures of its own, the prices of goods in the U.S. will rise sharply. You see right now we export our inflation to China by way of treasury bonds and newly printed Federal Reserve notes. Without the ability to export our debt and a lot of the dollars the Federal Reserve has been printing, all of that liquidity will be spent in the U.S. instead on more expensive goods. As more money enters our economy prices in general will be bid up and will rise and given how much the Federal Reserve has inflated the money supply over the last few years prices will rise by a lot. At that point, Economics 101 tells us that high prices will squelch demand and huge increases in unemployment will result.
Since the 1970s, the politicians in Washington have placed us in this no win situation with regard to trading with China. They have destroyed our industrial base with unconstitutional mandates and regulations, and collective bargaining laws. They have spent us into oblivion by financing a welfare/warfare state unmatched in human history. If we impose protectionist measures against China we will incur inflation in the short run and high unemployment in the long run. If we continue to borrow from China to buy their inexpensive goods we put ourselves on an unsustainable course. At some point, if it isn’t happening already, China will stop financing our purchases and absorbing our inflation. They will sell their goods elsewhere and Americans will pay higher prices. Our standard of living will plummet and China will replace us as the world’s number one economic superpower.
But, Chuck Schumer and his colleagues on the Hill are oblivious to all of this. Of course, they also ignore the fact that the Federal Reserve is the biggest currency manipulator in the world. Ben Bernanke and his cabal of economic central planners better known as the Federal Open Market Committee fix interest rates and determine the supply of money. These actions directly determine the value of the dollar. Before Congress complains about China for not using market forces to value the yuan it should look in the mirror.
And that is really why I consider Congress a rotten, stinking corpse. Time and again its members grandstand for personal political gain and leave the American people with the mess. Its hypocrisy is appalling. Lastly, it seems like it is constantly coming up with cockamamie schemes to ruin our economy further. This latest scheme places the blame on China for our own financial incompetence.
Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina.