China may be pushing the Fed off its Neo-Fisherian tilt-ie, it's obsession with raising rates because it's not normal to be at ZIRP so long.
http://lastmenandovermen.blogspot.com/2015/08/federal-reserve-plan-to-raise-interest.html
http://lastmenandovermen.blogspot.com/2015/08/bad-news-for-neo-fisherians-rate-hikes.html
Krugman suggests that China may not have gone far enough in what it's trying to do.
"China’s decision to devalue the renminbi had some economic logic behind it. As David Beckworth rightly points out, it’s not just about gaining a competitive advantage. China clearly has a weakening economy, whatever the official numbers may say, and would like to use monetary stimulus. But monetary autonomy and a fixed exchange rate don’t go well together; China’s capital controls give it some leeway, but it is nonetheless suffering from a lot of capital flight — and it wants to liberalize the capital account in pursuit of reserve-currency status. (A foolish goal, but that’s a subject for another day.)"
"So it would make sense on purely economic grounds for China to move to a free float, and gain the freedom to use monetary policy that, say, Japan has."
"But it’s important to understand how that works. When Japan loosens money, it creates an incentive to move funds abroad, causing the yen to fall. This process only stops once the yen has fallen enough that investors consider it undervalued, and are willing to buy Japanese securities in the expectation of a future yen rise. Exchange rate overshooting is an essential part of the story."
"China, however, did not let the renminbi float, nor did it devalue by enough to persuade investors that any future move was likely to be up. Instead, it only devalued a little."
"This is what Charlie Kindleberger used to call “taking the first bite of the cherry”. (Nobody takes just one bite out of a cherry.) China has now demonstrated that its currency peg is no longer solid; but it has come nowhere near to devaluing enough to create expectations of future appreciation. This is a recipe for convincing investors that the future direction of the currency is down — which means that capital flight will accelerate (and apparently already has.)"
"Now what? China could just let the renminbi float; given the current state of the Chinese economy, that would surely mean a large depreciation. But this would greatly increase trade tensions and pose problems for foreign policy. Maybe that’s a tradeoff worth accepting, but nothing in events so far suggests that China’s leadership was prepared to take that step. Instead, they went for a small move that was sufficient to destabilize expectations while producing trivial benefits."
http://krugman.blogs.nytimes.com/2015/08/12/china-bites-the-cherry/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body
I can't resist it. Forgive the digression but I have to quote Montreal Moe in Krugman's comments section:
"It was 170 years ago that one million Irish peasants were sacrificed on the alter at the Temple of Adam Smith and The Economist. It was 240 years that the great American experiment began with leadership that believe it was man not a supernatural force that decided destiny. Deciding that our welfare is more dependent on the well-being of an economic belief system than human needs seems more than enough reason to drop Sapiens from our taxonomic identity.Mark Twain was correct we are the end result of devolution not evolution."
Sounds like a typical Bernie Sanders supporter to me. Now this is what the word 'misanthrope' should mean if anything. Kind of ticks me off that this guy got published by the Times but not me.
"The question is why? As I explained in my last post, the proximate cause is the Fed's tightening of monetary conditions. China's currency is quasi-pegged to the dollar and that means U.S. monetary policy gets imported into China. The gradual tightening of U.S. monetary conditions since the end of QE3 has therefore meant a gradual tightening of Chinese monetary conditions. Recently, it has intensified with the Fed signalling its plans to tighten monetary policy with a rate hike. U.S. markets have priced in this anticipated rate hike and caused U.S. monetary conditions to further tighten. Through the dollar peg this tightening has also been felt in China and can explain the slowdown in economic activity. Consequently, China had to loosen the dollar choke hold on its economy via a devaluation of its currency."
"There is, however, a more fundamental reason for the devaluation. China has been violating the impossible trinity. This notion says a country can only do on a sustained basis two of three potentially desired objectives: maintain a fixed exchange rate, exercise discretionary monetary policy, and allow free capital flows. If a country tries all three objectives then economic imbalances will build and eventually give way to some kind of painful adjustment. China was attempting all three objectives to varying degrees. It quasi-pegged its currency to the dollar, it manipulated domestic monetary conditions through adjustment of interest rates and banks' require reserve ratio, and it allowed some capital flows. This arrangement could not last forever, especially given the Federal Reserve's passive tightening of monetary policy."
http://lastmenandovermen.blogspot.com/2015/08/federal-reserve-plan-to-raise-interest.html
http://lastmenandovermen.blogspot.com/2015/08/bad-news-for-neo-fisherians-rate-hikes.html
Krugman suggests that China may not have gone far enough in what it's trying to do.
"China’s decision to devalue the renminbi had some economic logic behind it. As David Beckworth rightly points out, it’s not just about gaining a competitive advantage. China clearly has a weakening economy, whatever the official numbers may say, and would like to use monetary stimulus. But monetary autonomy and a fixed exchange rate don’t go well together; China’s capital controls give it some leeway, but it is nonetheless suffering from a lot of capital flight — and it wants to liberalize the capital account in pursuit of reserve-currency status. (A foolish goal, but that’s a subject for another day.)"
"So it would make sense on purely economic grounds for China to move to a free float, and gain the freedom to use monetary policy that, say, Japan has."
"But it’s important to understand how that works. When Japan loosens money, it creates an incentive to move funds abroad, causing the yen to fall. This process only stops once the yen has fallen enough that investors consider it undervalued, and are willing to buy Japanese securities in the expectation of a future yen rise. Exchange rate overshooting is an essential part of the story."
"China, however, did not let the renminbi float, nor did it devalue by enough to persuade investors that any future move was likely to be up. Instead, it only devalued a little."
"This is what Charlie Kindleberger used to call “taking the first bite of the cherry”. (Nobody takes just one bite out of a cherry.) China has now demonstrated that its currency peg is no longer solid; but it has come nowhere near to devaluing enough to create expectations of future appreciation. This is a recipe for convincing investors that the future direction of the currency is down — which means that capital flight will accelerate (and apparently already has.)"
"Now what? China could just let the renminbi float; given the current state of the Chinese economy, that would surely mean a large depreciation. But this would greatly increase trade tensions and pose problems for foreign policy. Maybe that’s a tradeoff worth accepting, but nothing in events so far suggests that China’s leadership was prepared to take that step. Instead, they went for a small move that was sufficient to destabilize expectations while producing trivial benefits."
http://krugman.blogs.nytimes.com/2015/08/12/china-bites-the-cherry/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body
I can't resist it. Forgive the digression but I have to quote Montreal Moe in Krugman's comments section:
"It was 170 years ago that one million Irish peasants were sacrificed on the alter at the Temple of Adam Smith and The Economist. It was 240 years that the great American experiment began with leadership that believe it was man not a supernatural force that decided destiny. Deciding that our welfare is more dependent on the well-being of an economic belief system than human needs seems more than enough reason to drop Sapiens from our taxonomic identity.Mark Twain was correct we are the end result of devolution not evolution."
Sounds like a typical Bernie Sanders supporter to me. Now this is what the word 'misanthrope' should mean if anything. Kind of ticks me off that this guy got published by the Times but not me.
Ok, digression over. David Beckworth argues this is the direct outgrowth of NF at the Fed-ie, it's desire to raise interest rates. Basically US money has tightened this year relative to the rest of the world and therefore China which is slowing needs to decouple its yuan with the dollar.
"There is, however, a more fundamental reason for the devaluation. China has been violating the impossible trinity. This notion says a country can only do on a sustained basis two of three potentially desired objectives: maintain a fixed exchange rate, exercise discretionary monetary policy, and allow free capital flows. If a country tries all three objectives then economic imbalances will build and eventually give way to some kind of painful adjustment. China was attempting all three objectives to varying degrees. It quasi-pegged its currency to the dollar, it manipulated domestic monetary conditions through adjustment of interest rates and banks' require reserve ratio, and it allowed some capital flows. This arrangement could not last forever, especially given the Federal Reserve's passive tightening of monetary policy."
"One manifestation of the tightening monetary conditions in the United States has been the appreciation of the dollar. Given the peg, the yuan has been appreciating too and appears to have become overvalued. China maintaining its peg against an apppreciating dollar would only have worsened this yuan overvaluation and intensified the drag it created for the Chinese economy."
"Already, the resulting slowdown and anticipation of Chinese authorities devaluing the yuan has lead to a $800 billion capital outflow from China. Since China desires its currency to become fully convertible in the future and because party leaders in China are unlikely to give up control of domestic monetary policy, it is almost a given that the adjustment to Chinese policy would have to come through a change to the yuan exchange rate. So this is the deeper reason for the devaluation. And it is the reason that the devaluation is probably just the first step toward an eventual floating of the yuan."
http://macromarketmusings.blogspot.com/2015/08/impossible-trinity-deflationary-shocks.html
So this is the Fed's screw-up first and foremost. Krugman may be right that China isn't doing it right but clearly it had to do something.
http://macromarketmusings.blogspot.com/2015/08/impossible-trinity-deflationary-shocks.html
So this is the Fed's screw-up first and foremost. Krugman may be right that China isn't doing it right but clearly it had to do something.
You have to wonder if any of this is going to make the Fed reconsider. It certainly should give ammunition to the doves at the Fed-but how many are there right now?
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