In “Asian Mercantilism Tops Out” on November 16th, I wrote:
“I think it is apparent that the golden age of Asian mercantilism has reached its zenith.”
That meme has taken hold and has propagated to this Ambrose Evans-Pritchard column via Diana Choyleva of Lombard Street Research:
“Ms. Choyleva said China drew a false conclusion from the global credit crisis that their top-down economy trumps the free market, failing to see that the events of 2008-2009 did equally great damage to them – though of a different kind. It closed the door on mercantilist export strategies that depend on cheap loans, a cheap currency, and the willingness of the West to tolerate predatory trade.”
AEP cites some amazing statistics about China’s housing bubble. For example, house prices in Beijing are 22 times disposable income, while prices here topped out at 6.4 during our bubble. Can you imagine the level of mismanagement going on in China right now? It makes our i-bankers look like nuns! AEP thinks China is toast, and I agree.
China is comically incompetent, even when compared to our government. For example, the Chinese print absurd amounts of yuan to maintain their currency peg to the dollar, and then they try to deal with the resulting inflation by putting price controls on Walmart! Ridiculous! And that can’t be good for Walmart’s profits either.
The gold-bug/Fed-stalker crowd here is always carrying on about the dollar collapsing and being replaced by gold. Fools. That scenario is a million times more likely to happen in China.
Why are the Chinese deliberately blowing up? Sure, their inefficient sweatshop economy would lose export market-share if they let the yuan appreciate against the dollar. But I think they are clinging to that ruinous peg just to spite the USA. We are in a pissing contest now. When Ben Bernanke loads another round into his QE2 bazooka, the Chinese say: “Bring it on!” Then they furiously print more yuan to buy up all the fresh dollars to keep their peg steady.
When people call this a currency war, they are not exaggerating about the “war” part. Not one bit. And so far, the USA is winning. The casualties are all on the the Chinese side, as the people suffer the food inflation being imposed upon them by Beijing. But I don’t feel guilty. After all, all that Beijing has to do is turn off the printing presses, let the yuan appreciate, and the cost of American food imports would drop like rock. Problem solved.
Beijing could also spend some of its ridiculous dollar hoard on food imports. If they did, everybody would win. The Chinese people would get lower food prices, our trade deficit would be reduced, and Bernanke’s QE2 dollars would get injected into our economy instead of being sequestered by the PBOC.
But they won’t. The Chinese have chosen to be a trade adversary rather than a trade partner, just as I predicted on November 16th:
“The Beijing knuckleheads look like they are willing to throw down with Uncle Sam.”
And so they have. And it is quite the spectacle, is it not?