Who Needs Trade Talks When You Can Have……

US Intervention in the Currency Market?

Too much power for the congress? Maybe.

New legislation is about to be introduced by the Senate Banking committee in order to deal with the undervaluation of the Chinese yuan. Sounds like a good idea, but treading carefully is in the best interest of everybody. The proposed method of enforcing change involves redefining currency manipulators in order for it to describe China.

Countries with a material global account surplus and a significant bilateral trade surplus with the United States would be classified as “currency manipulators, without regard to intent,” they said.

The eventual move to a floating yuan would be great, helping domestic firms compete and decreasing the trade imbalance of the United States, but we must be mindful of inflation, which has kept interest rates high for some time. China’s cheap production acts like a subsidy to the American consumer. Removing this subsidy at a time when energy prices are very high and the housing market is slumping could seriously damage consumer confidence, removing any benefit of a fair currency policy.

It is obvious that this new bill is politically driven. There probably isn’t a congressman who hasn’t heard complaints from their constituents about the negative impact of China on local business. Nonetheless, we must be mindful of potential consequences of intervening and remember that as we stand, we cannot do without China as a trade partner.

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