First principles on wealth and economic growth

Shanghai – Before and after

In all human history there have been just four ways of securing the goods, services, or the wealth to purchase them, required to maintain life or a desired standard of living.

First, we can receive them freely from others as gifts or charity. Second, we can take them from others as theft or tax. Third, we can borrow them from others with the promise of repayment in the future. And fourth, we can receive them freely in exchange for a good and service we provide in return.

It is clear that the first and second methods depend entirely on someone else producing the good or service in the first place. You cannot be gifted or steal what doesn’t exist. These methods are purely redistributive and add nothing to the available stock of goods and services, the increase of which is the essence of economic growth and increasing wealth.

Method three, borrowing, is fine as long as it is used for investment to increase the stock of goods and services out of which it will be repaid. The fourth method, free production and exchange, is best of all. People secure the goods and services needed or desired by exchanging those they produce for those produced by others. People’s desire to consume more induces them to produce more. The stock of goods and services available, society’s wealth, increases.

All societies engage in a mixture of these methods, different sections of those societies relying on different methods at different times. But it is clear that societies which rely to a greater extent on the first and second method are, at best, shuffling round a stagnant stock of goods; not creating wealth but merely redistributing it.

Societies using more of the third method could be acting wisely if they are borrowing to invest, but if they are just borrowing to fund current consumption then they will be paying this back out of the same (or smaller) stock in the future. Societies more reliant on the fourth method will be increasing their wealth unambiguously.

So we can say that if the aim of society is to increase wealth it ought to be utilising lots of the fourth method, the third method only to fund investment, and the first second method as little as possible.

This throws stark light on the shift in relative wealth going on in the world today. Wealth is increasing in Asia in part because relatively large proportions of their populations are producing things people want to buy. And, in part, the wealth of the western economies is stagnating or declining because, relatively, we have a greater share of our populations receiving the goods and services they need and desire (or the wealth to purchase them) as transfers from others. We see ever more borrowing to finance current spending and ever more redistribution of wealth at the expense of its creation.

If a country has a great many goods and services available it is wealthy. If individuals are able to command a great deal of goods and services they are wealthy. The nature of increased wealth is an increased number of goods and services. The more people we have producing them and increasing this number, as in Asia, the wealthier we will be.

This article originally appeared at The Commentator

Three questions about North Korea

Kim Jong Un

Kim Jong-il, former leader of North Korea and, since his death in 2011, Eternal General Secretary of the Worker’s Party of Korea, was generally considered a wily, if oppressive, old fox. When, inevitably, North Korea’s communist economics periodically led to famine, Kim II would rattle his sabre just enough to prod the West to buy him off with a little aid. As weird as he might have looked and as twisted as the society he ruled may have been, Kim II could be seen in this light as a rational actor on the diplomatic stage.

As his successor, his equally funny-looking son Kim Jong-un, engages in a prolonged and particularly bellicose bout of belligerence, the first question is whether that assessment also applies to him. Is Kim III a cynic or a lunatic?

It’s a question we can ask about North Korea more generally. When Kim II died in December 2011 many in the West giggled at the bizarre scenes of hysterical grief among the citizenry captured on camera and beamed around the world. Surely, we thought as we saw North Koreans bashing themselves over their heads and howling, they were doing it for the benefit of the gun-toting guards just out of shot. Maybe they were. But there’s a scarier possibility: they actually meant it.

North Korea, not Sweden, is the ultimate welfare state; no government promises to be so all-encompassing in providing for its people. Beyond its borders, so North Koreans are constantly told from birth, lie Yankee Imperialists and their Japanese and South Korean lackeys who are hell-bent on crushing North Korea and liquidating its people. The state, controlled by the Workers Party of Korea, and headed by Chairman of the Central Military Commission, Supreme Commander of the Korean People’s Army, First Chairman of the National Defence Commission, First Secretary of the Worker’s Party of Korea, and Supreme Leader Kim Jong-un (ably assisted by his dead father and grandfather who is Eternal President of the Republic), is all the protects them from annihilation.

North Koreans also depend on the beneficence of the State, Party, and Supreme Leader for their daily bread. From the moment they are born they are taught that they are clothed, fed, and housed at the “grace of the Chairman”. The state is the only guarantor of the welfare of North Koreans, from cradle to mass grave.

So to the average North Korean the death of Kim II probably did represent a calamity of existential proportions. These are people who have been reduced to a state of total, helpless, physical and psychological dependence on the unholy trinity of State, Party, and Leader which, like the Holy trinity, are actually all the same thing. North Koreans were suddenly faced with what they had been told was impossible, life without the Supreme Leader, and, like dependents everywhere, they collapsed mentally.

Whether Kim III is cynic or lunatic, the key to dealing with him lies with China. Without Chinese military intervention in the Korean War in 1950 North Korea would have been strangled at birth. Mao Tse Tung called the relationship between the two countries “as close as lips and teeth” and it is widely thought that what passes for North Korea’s economy is entirely dependent on Chinese aid.

If this is so, China can flick the switch on Pyongyang’s life support whenever it likes. And, if that is so, you have to wonder why they don’t, why they continue to tolerate North Korea’s behaviour.

A North Korea which is pliant to Beijing but plausibly dangerous to everyone else could actually work quite well for the Chinese. If the United States ever feels compelled to resolve the North Korean issue with a degree of finality it will need Chinese assistance or, at the very least, approval. The more dangerous North Korea is deemed to be the more Beijing can ask in return for giving it up. Is it a coincidence that North Korea is kicking off just as tension mounts between China and Japan?

This, however, all hinges on the answer to the second question: how much control does the regime in Beijing have over the regime in Pyongyang? It’s possible the answer is none or less than we think and that North Korea truly is a rogue state. Then we return to the first question: is its leader cynic or lunatic?

Either way the road to Pyongyang runs through Beijing. The third question is what will be the toll?

This article originally appeared at The Commentator

Hold onto your hats, China is getting sleepy

Come tumbling down?

Britain is in deepening recession. Growth in the United States is slowing. The prospects for the euro darken by the day. The global economy is not so much waiting for the other shoe to drop as bracing itself for an entire branch of Foot Locker to land on its head.

One particularly precariously perched size 14 is China. The country which, since abandoning the immiserating economic madness of socialism and moving towards capitalism, has seen unprecedented increases in wealth for its people, now faces a bust.

In the first quarter of 2012 the Chinese economy grew at a rate of 8.1 percent, spectacular by western standards but China’s slowest in three years. The World Bank’s predicted growth for China in 2012, 8.2 percent, would be its lowest since 1999.

It is dangerously close to the 8 percent China watchers generally consider sufficient to absorb workers moving to towns and cities from the countryside, and maintaining social stability.

How has China come to this pass? Since the mid-1990s the People’s Bank of China, the central bank, has kept the yuan pegged to the dollar. This has had the effect of keeping Chinese goods competitive with US produced goods in spite of a depreciating dollar.

This has prompted angry outbursts from Congress about currency manipulation, a bizarre charge coming from the country which counts Quantitative Easing and Operation Twist among its bag of monetary tricks.

Another effect, however, has been to foster a credit boom in China. In order to follow down a dollar being eroded by constant monetary expansion the Chinese have been driven to initiate their own expansion to keep pace and maintain parity.

In other words, in return for all those clothes and consumer goods they export to the United States, China imports the Federal Reserve’s monetary policy.

The People’s Bank put their pedal to the monetary metal in 2008 to combat the post Lehman global downturn. Interest rates were slashed and borrowing rocketed, loan growth totalling 87 percent of GDP in the following five years.

American style monetary policy has had American style effects. As interest rates fell property looked a better place to stash you’re your wealth and a real estate boom got under way. According to the IMF the average ratio of house prices to earnings reached 20 in Beijing and 14 in Shanghai, “triple the levels in US cities during the subprime bubble

With such returns available, and the funds readily accessible to fund it, construction boomed. The BBC reports that since the start of 2009 China has built 2.3 billion square metres of residential property space with another 3.2 billion in the pipeline. This is floor space for between 200 million and 250 million people but, according to the World Bank, even with China’s rapid urbanisation, it will take 15 years for 200 million Chinese to make the switch from rural to urban life.

The orgy of over construction is most starkly seen in newly built but deserted cities like Ordos City, built for 1 million but housing no more than 28,000.

In October 2010 the People’s Bank set out to do what no monetary authority has ever managed: engineer a soft landing from a credit boom. Interest rates rose and the property boom cooled.  In November new home prices in Beijing fell by 35 percent from October.

But the problem with a credit boom is that it fosters malinvestments which will never generate a return sufficient to cover their funding costs if credit conditions are ever allowed to tighten (let alone reflect the economy’s underlying time preference).

So it is with China. An economy which had loaded itself with cheap debt on such a massive scale couldn’t cope with higher interest rates.

The People’s Bank thus finds itself caught in the same ratchet as many western economies. Interest rates decline and spur a boom. Inflation follows and interest rates rise but not to the previous levels. Even so, the boom turns to bust and interest rates are cut again leading to another boom…

As in Europe, Britain, and the United States, China might well find that its interest rates only move in one direction: downwards. Convergence wasn’t supposed to be like this.

The People’s Bank has reacted by lowering the official one-year borrowing rate and the one-year deposit rate by 0.25 percent each to 6.31 percent and 3.25 percent respectively. Industrial activity is picking up and prospects have brightened for now.

But how long before we are back where we were in October 2011 when pressure grew for China’s monetary authorities to tighten?

When China wakes the world will tremble said Napoleon. Let’s hope the same isn’t true when it nods off

This article originally appeared at The Commentator

Paul Ryan’s 40 year detox: America can’t rely on China

And now a word from our sponsors…

The reaction of some to the release of the Path to Prosperity budget last week by Representative Paul Ryan, Chairman of the House Budget Committee, was incandescent fury.

A New York Times editorial painted a picture of America under the Ryan budget as

one where the rich pay less in taxes than the unfairly low rates they pay now, while programs for the poor — including Medicaid and food stamps — are slashed and thrown to the whims of individual states. Where older Americans no longer have a guarantee that Medicare will pay for their health needs. Where lack of health insurance is rampant, preschool is unaffordable, and environmental and financial regulation are severely weakened”

The Washington Post exhumed Dickens and Orwell on the way to saying

“Ryan would cut $770 billion over 10 years from Medicaid and other health programs for the poor, compared with President Obama’s budget. He takes an additional $205 billion from Medicare, $1.6 trillion from the Obama health-care legislation”

According to The New Republic the budget

“would take health insurance away from tens of millions of people, while effectively eliminating the federal government except for entitlements and defense spending”

The Huffington Post quoted one Eddie Vale, a spokesman from pressure group Protect Your Care, as saying “A Republican budget to end Medicare is a Republican budget to end Medicare, no matter what you call it”

What’s most striking about all this is what’s missing. Mr Vale and the others quoted haven’t asked themselves the crucial question about Medicare and food stamps and all the rest; will the Chinese be happy to keep paying for it all?

The United States government borrowed $4 billion today. It borrowed $4 billion yesterday and it will borrow $4 billion again tomorrow and so on. Federal government debt, which was rising by about $625 billion a year under George W Bush, is, under President Obama, rising at $1 trillion a year. According to official figures in December Federal government debt passed 100% of GDP.

In National Review Mark Steyn does an excellent job of conveying the full scale of this explosion of debt

“The 2011 budget deficit, for example, is about the size of the entire Russian economy. By 2010, the Obama administration was issuing about a hundred billion dollars of treasury bonds every month — or, to put it another way, Washington is dependent on the bond markets being willing to absorb an increase of U.S. debt equivalent to the GDP of Canada or India — every year”

And what is the Ryan budget, cause of such wailing and gnashing of teeth, proposing to do about this financial catastrophe? Under what the New York Times called “the most extreme budget plan passed by a house of Congress in modern times” Ryan doesn’t actually propose to balance the Federal budget for another 40 years.

So far America has gotten by through buying consumer goods from China and sending dollars in return. The Chinese then effectively loan these dollars back to America by buying Federal government debt, Treasury bonds. The Federal government then spends the receipts from these Treasury bond sales on Medicare and food stamps and all the rest. This is how the Federal government pays its way and it is why China is the world’s largest owner of US government debt with holdings of $1.148 trillion.

Why have the Chinese been so willing for so long to fund the consumption of Americans who’s per capita GDP is nearly six times higher than theirs?

One reason is geostrategic. America will not be able to confront the emergent power of China over Taiwan or anything else if the US government has to borrow the money from the Chinese to do so.

Another is connected to the economy and domestic politics. It has long been an article of faith among China watchers that China’s economy needed growth of 8% a year to guarantee jobs for the millions of young people entering the workforce every year, failure would lead to political unrest. If the Chinese government could only guarantee these jobs in factories producing goods for sale in the US by loaning the US the money to buy them, so be it.

Either way the entire edifice of the United States government is dependent on a line of credit from China and elsewhere. In total one third of US government debt, $5 trillion, is held overseas. With a bit of help from the Quantitative Easing of the Federal Reserve this vast market for Federal government debt has kept bond yields historically low while debt has ballooned. The Federal government is dependent upon the continuation of this line of credit for its own continuation.

But there are signs that the willingness of poor Chinese to keep lending money to rich Americans is coming to an end. Last year the previously insatiable Chinese reduced their holdings of US government debt for the first time since records began in 2001. Not only China is suffering indigestion at the amount of US government debt it is being asked to swallow. Russia and India have drastically reduced their holdings.

The reason is obvious. As a borrower, like America, piles debt upon debt it becomes ever less likely that they will be able to pay it back so you stop lending to them. Indeed, this outcome was, at some stage, inevitable.

But what of the effect on America? Like anything else as the buyers for Treasury bonds disappear their price will fall. In the world of bond financing this means higher bond yields, rising American borrowing costs in other words.

The Federal government’s debt binge will come to an end. It is simply a question, to paraphrase Von Mises, of whether this should happen sooner as the result of a voluntary abandonment of increasing indebtedness, or later amid the catastrophe of default and inflation. Maybe Ryan’s 40 year detox isn’t so bad after all?

This article originally appeared at The Commentator

The economic reality of 2012

We’re doomed!

Going into 2011 it was still possible to find economic optimists. The Office for Budget Responsibility predicted relatively perky growth of 2.1 percent for 2011 and why not? The OBR had just revised its growth figures for 2010 up to 1.8 percent from its previous estimate of 1.2 percent.

A year on this looks like an economic wonderland. In November 2011 the OBR forecast growth for 2012 of a paltry 0.7 percent following just 0.9 percent in 2011 compared to that 2.1 percent forecast a year earlier.

What does this teach us? One lesson we should take is to be wary of the forecasts of economic ‘experts’.

One lesson we shouldn’t take is that the answer is more Keynesian stimulus of the kind that generated those growth rates of nearly 2 percent in the halcyon days of 2010. For one thing, that growth came at the expense of a deficit of 11 percent of GDP, or a borrowed £147 billion.

And it didn’t work. Of course a vast infusion of borrowed cash will bump up GDP figures, they measure spending in an economy as a proxy for measuring real economic activity. But the thinking behind stimulus spending is that it stimulates the economy to get back on track. That the economy slumped when this stimulus was removed proves that it failed.

It failed because the problem is not the exogenous drop in aggregate demand of Keynesian folklore which must be compensated for by government spending. The problem is the thoroughly endogenous one of debt. It is because people are paying for yesterday’s consumption that they are cutting back on today’s. Simplistic non-solutions based on the Keynesian misdiagnosis will continue to fail.

So what can we expect for this year? If we accept that the problem is not simply a lack of “animal spirits” but one of debt both public and private (or private debt made public) a grim prospect emerges.

There are two ways of dealing with debt; you can pay it back or you can default and not pay it back. Within the default option are two sub options; you can default overtly and simply refuse to pay your debts, or you can default covertly and pay the debt with devalued currency.

Prospects in the eurozone, the current nexus of the financial crisis, depend on which of these paths is followed.

There are countries loaded with debt like Greece, Italy or Ireland, and those like Germany which aren’t. The choice will be, as elsewhere, whether the indebted countries repay or default. An overt default would mean an indebted country simply refusing to pay its debts leading to exit from the euro. A covert default would mean paying debtors back with a devalued euro, inflation, in other words. There is widespread opposition to the first and German opposition to the second and German opposition is all the opposition that counts.

That leaves repaying the debts in full. With Germany unwilling to help out in the form of eurobonds the full burden falls on taxing and spending measures in the debtor countries. The question for 2012 is whether these fragile economies can take the drastic fiscal tightening necessary. If they cannot and if Germany holds to its current position we go back to the option of overt default and break up of the euro.

Other countries are using a mix of fiscal and monetary policy, or repayment and default, to deal with their debt burdens. Britain’s spending cuts are more imaginary than real and much of the reduction in British debt is being done by inflation which has been above the Bank of England’s target since December 2009.

Between these scissor blades household incomes will fall or, at best, stagnate in Britain in 2012. GDP will do likewise providing the eurozone does not collapse. But given Britain’s debts it would be folly to think that any other government with any other program could produce a better result. As bad as it is, it’s as good as it gets.

Another country which has been using the printing press to ease its debt burden has been the United States. With its combination of eye watering deficits and low interest rates the US been held up by Keynesians as proof that deficit spending can be sustained.

In truth its unique position as issuer of the world’s reserve currency gives the US the ability to produce vast quantities of dollar denominated securities without seeing its borrowing costs rise.

But problems deferred are not problems avoided. In the long term the US deficit will have to be brought down. This will become more of an issue through the year as November’s election approaches.

In the shorter term the danger is of a dollar dump. The continuing decline in the dollar’s value will continue to trouble investors in China, the Gulf and elsewhere who are holding dollar denominated debt. This is behind the intermittent skirmishes which have become known as ‘Currency Wars’. Will these erupt into full scale war in 2012 as investors dump their dollars and inflation results?

It’s unlikely. This is not because of any strength in the US economy or policymaking but simply because everywhere else is worse. Adam Smith said that there is much ruin in a nation and there is a little more ruin left in the United States.

This is a very western-centric analysis and thus incomplete. The problems China faces as it tries to reign in the effects of its credit boom require a separate article. But increasingly global economic issues will be framed by the likes of India and Brazil. Countries such as this face problems and are less homogeneous than the famed BRIC acronym suggests. But as the west struggles under its crushing debts the continuing rise of economies elsewhere could be the real story of 2012.

This article originally appeared at The Commentator

Religious Keynesianism and Obama’s blind faith


Birds of a feather…

In the film ‘2010’ Milson tells the astronaut Heywood Floyd “Whenever a President is going to get us into serious trouble they always use Lincoln”.

During his much trailed speech on jobs in front of a joint session of Congress last week President Obama took no chances throwing in Kennedy along with Abe. But given the content of the speech he might have been better invoking Nixon; if two wrongs don’t make a right, try a third.

Obama’s proposed American Jobs Act contains nothing he hasn’t tried already. Since his election Obama has added nearly $5 trillion to the Federal debt, helped by his last stimulus package of $787 billion back in 2009. In that time unemployment has risen by two percent. Under the proposed Act Obama will spend another $447 billion, seemingly working on the belief that doing half of what didn’t work the first time will work the second time.

Paul Krugman, one of the leading Keynesian cheerleaders for the President’s failed policies, accuses opponents of having ‘drunk the Kool Aid’ of free market philosophy. This is a reference to the followers of cult leader Jim Jones who killed his gullible followers by making them drink poisoned Kool Aid.

But in arguing, as they do, that the reason we are in this mess is because the stimulus wasn’t big enough and that all we need to do is commit our economic souls more fully to Keynes, it is the Keynesians who remind one of those religious types who, after a disaster, see it as punishment for being insufficiently pure of faith. Joan Robinson once referred to ‘bastard Keynesianism’. This is religious Keynesianism.

Also, the particulars of the package are hideously badly designed. Obama promised to “offer ideas to reform a corporate tax code that stands as a monument to special interest influence in Washington” but he also proposed, as Peter Ferrara wrote in the American Spectator, a raft of new loopholes including “a new tax credit of $4,000 for hiring the long-term unemployed…a tax credit for hiring veterans who have been unemployed for more than six months, and another tax credit for hiring the unemployed with service connected disabilities”

With the failure of the last stimulus package and the dog eared nature of the new one the belief that Obama’s  Jobs Act will do any good at all is a case of hope (and ‘Change’) triumphing over experience.

But beyond this the US can’t afford it. At one point during his speech Obama said “Building a world-class transportation system is part of what made us an economic superpower. And now we’re going to sit back and watch China build newer airports and faster railroads?”

Well yes actually, you are. The Chinese are building those airports and railways because they can afford to, the United States can’t. In fact, watching Obama speak and make billion dollar spending commitment after billion dollar spending commitment you found yourself thinking ‘I hope the Chinese are happy to pay for all this’

And they may be reaching the end of their willingness to work, save, and lend those savings to Americans to spend on things that most Chinese can’t afford. This week a senior official of the Chinese central bank spoke of Beijing’s wish to “liquidate” its holdings of US Treasury bonds. As the biggest buyer of US debt the prospect of this market drying up presents the Treasury with the nightmare scenario for a heavily indebted economy like America’s of rocketing bond yields. Think Athens on the Hudson.

They are no more impressed with Obama’s plans in Buffalo than they are in Beijing. A Bloomberg poll this week found that while sixty-two percent of Americans disapprove of Obama’s handling of the economy just thirty-three percent approve.  Bloomberg also found that “only thirty-six percent of respondents approve of his efforts to create jobs, thirty percent approve of how he’s tackled the budget deficit and thirty-nine percent approve of his handling of health care”. Americans doubt whether the Jobs Act will do anything for 9.1 percent unemployment by a margin of fifty-one percent to forty percent with fifty-six percent of independents sceptical. Overall, at 45 percent, Obama’s approval rating is the lowest of his presidency.

These weren’t the only bad figures for Obama to emerge this week. Inflation and jobless claims were up, manufacturing was down and poverty hit its highest rate for eighteen years.

This isn’t all Obama’s fault, most western countries face a painful process of deleveraging, but few are following his lead of merrily piling debt on top of debt in the hope that more debt will solve a debt crisis.

Obama has hit the road with his plan like some commission hungry vacuum salesman. He has, as ever, been met with adoring crowds, though these may be smaller than before, Bloomberg also found that those who supported him in 2008 have soured. As then the crowds have been chanting inanely but the fact that Obama’s message always seems to be capable of being summed up in between one and three words, be it ‘Hope’, ‘Change’, ‘Yes We Can’ or, now, ‘Pass This Bill’, suggests that it isn’t much of a message.

But it never was. On the campaign trail candidate Obama said “I’m not talking about a budget deficit. I’m not talking about a trade deficit…I’m talking about a moral deficit. I’m talking about an empathy deficit.” So of four deficits mentioned only two actually exist and he focused on the two that don’t.

It is an article of faith that Republican candidate Michele Bachmann is an idiot. She might be. But can you imagine how idiotic she would be considered if she went on Fox News and said “If you elect me I will spend $5 trillion dollars and increase unemployment by two percent”?

Yet that is exactly what President Obama has done. ‘Stupid is as stupid does’ as a wise man once said.

China’s uncomfortable choice

Change for a dollar

One of the major flashpoints in the ‘currency wars’ which have attracted comment recently has been between the USA and China. Given that you have a dispute between the world’s only superpower and its only challenger some see storm clouds on the major geo political weather front of the 21st century.

The US, on the one hand, is angry with China for pegging its currency to the dollar meaning that, as the Federal Reserve forces the dollar down to stimulate exports, China has been cancelling this effect out by forcing the yuan down. President Obama has called this an “irritant”. The Chinese, on the other hand, are angry with the US for devaluing the dollar, partly because it is meant to undercut Chinese exports and partly because China is holding $2.6 trillion in reserves. A Chinese central bank official recently warned the Federal Reserve’s loose monetary policy could make “the occurrence of another crisis is inevitable”.

A question to be asked, however, is just how strong is China’s footing in this dispute? Recent inflation figures suggest that China’s dollar peg is already under pressure. In October inflation rose to 4.4%, up from 3.6% in September, the fastest rise for two years. The Financial Times reported “Li Wei and Stephen Green at Standard Chartered in Shanghai said that on a seasonally adjusted basis, consumer price inflation increased at an annualised rate of 12.1 per cent in October, up from 5.2 per cent the month before”.

The Chinese are adopting some well worn old methods to deal with this. Blaming hoarders for forcing prices up the Chinese cabinet warned it would take “forceful measures” against them and mooted capping prices. It’s unlikely that these band aids will work any better than they have in any other place at any other time, leading instead to market distortions, shortages and a thriving black market. This is because, as Milton Freidman observed nearly 50 years ago, inflation is a monetary phenomenon. If the supply of money increases relative to the amount of goods and services in an economy (subject to the massive caveat that demand for money doesn’t change) then you will have inflation.

By pegging its currency to the dollar China is importing American monetary policy. With low interest rates and fresh bouts of quantitative easing the Federal Reserve is pumping out an enormous amount of dollars pushing down their value. To maintain parity the Chinese must also lower the yuan by pumping more of them out. Reliable figures are hard to get hold of in this secretive state but one estimate is that 4.3 trillion yuan have been injected into the Chinese economy. Given the current policy of the Federal Reserve China can either keep its dollar peg and accept inflation or raise interest rates and see the yuan rise against the dollar. Their only win win situation is if the Fed can be convinced to tighten, a cause in which the Politburo has some unlikely allies in Congressional Republicans.

As China pushes for this outcome expect ‘currency war’ barbs to keep zipping across the Pacific. Both sides will continue to hurl charges of currency manipulation at the other. Theses charges are empty. In the age of fiat currencies everyone is a currency manipulator.

This article originally appeared at Global Politics