Re: Dollar-New Agenda (Palley)

["g kohler" <kohlerg@xxxxxxxx>]

Reference:
Thomas I. Palley, "Beyond the Over-valued Dollar: A New Agenda to Avoid
Future Dollar Misalignments", Policy Discussion Paper, December 2003

Comment:
Isn't there also a major geopolitical, rather than purely
economic-technical, problem? The Chinese strategy of pegging the yuan to the
dollar at a low exchange rate is mercantilist in intention. The potential
economic benefits for China listed in the paper in the event of abandoning
this mercantilist strategy may be plausible, but they do not seem to be very
great in comparison with the geopolitical benefits to China of the present
mercantilist strategy. China is a Third World country that is treated by USA
as its major geopolitical rival. Its voting power in international financial
organizations is negligible. Even the paper does not explicitly advocate to
accord to China the status of a major economic power. Thus, from the
viewpoint of global struggle between poor and rich countries, the Chinese
mercantilist strategy makes sense for China.

Actually, the list of potential economic benefits to China from abandoning
this strategy could be augmented by adding a major disadvantage. If
historical precedents can be applied to this situation, there is the
precedent of Japan and Germany between 1945 and 1971 in relation to the US
economy. Due to American fiat, the currencies of Japan and West Germany were
pegged to the US dollar during that period at a low rate - for example, US
dollar to Deutsche Mark 1 : 4. Sheltered by this exchange rate, the two
countries had so much economic growth that the US felt uncomfortable about
it. Thus, at least in my unauthenticated opinion, a major purpose of Nixon's
abandonment of the gold standard was to pull the plug on vigorous Japanese
and German GDP growth. If you examine the time series for the growth of
those countries, you see that Japanese and West German economic growth
slackened off significantly after 1971. Mission accomplished (from the US
point of view) - namely, the competitors were reigned in. Thus, if China
abandoned its present strategy, its growth rate would likely diminish as
well. A major difference is that the pre-1971 exchange rates for Japan and
West Germany were imposed, whereas the low yuan exchange rate to the dollar
is self-made by China. If it is self-made, then China has a geopolitical
bargaining chip and the United States would have to engage in some big-time
geopolitical horse trading in order to get China to drop the present
strategy.

Don't get me wrong, please. I think a return to some global-Keynesian
management of exchange rates would be a good idea, but the power relations
and the element of geopolitical struggle between an incumbent and a
challenging hegemonial power should be factored into the discussion.

Respectfully,
Gert
(Gernot Köhler, Ph.D.)