A Broader Framework for Analyzing the US-China Problems with an Emphasis on Exchange Rates

As experts have long recognized, debates about exchange rates are largely political. Even existing exchange rates are results of both market forces and manipulations by the big players including the central banks. The slogan of central bank independence is largely a smokescreen to hide the roles of specific factions of big capital in each nation state. According to economic theory, the exchange rates are indeed a general equilibrium solution under stringent assumptions of a model economy without frictions. Therefore, there should be an FEER for any pair of currencies. In the real world, the frictions matter. Most importantly, these include but are not limited to political interventions. The reality is complex. Just to mention one set of contradictory forces, a revaluation of RMB upwards will ease inflationary pressures on China but will not be welcome to the powerful exporting interests particularly in Southeast China. The practical political question from the Chinese side is how far to revalue and how fast. The American jawboning as well as the frictions of the complex economies of the world have led to considerable fluctuations in the RMB- dollar rate. The overall tendency is towards revaluation of RMB. However, imbalances will not disappear soon enough. Underlying all these imbalances are both political factors and global financial instability together with the economic weakness of the US . The long- term growth rate will not and perhaps can not equal that of the golden age of capitalism during the 1950s and 60s. The policy- induced weaknesses from the Bush-Greenspan era are still with us and will not disappear soon.The problems of heavy financialization and indebtedness including the lack of fundamental institutional reform in the US will not go away any time soon. Thus the medium term outlook for the US and the World Economy is crisis- ridden and uncertain. This will most likely result in more political frictions internationally. China will loom large in this conflictual scenario but so will many others ...