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jmherbener
ParticipantOf course, Dr. Murphy is correct. The price of anything adjusts to clear the market. Governments can “manipulate” the price of anything by participating in the market for it either as a buyer or seller. The quantitative effect of a government’s manipulation depends on its relative size as a participant compared to the overall market. If a government wants to increase the price of something, it can buy more of it and if it wants to decrease the price of something it can sell more of it. Of course, the effect on price from a one-time purchase or sale of something will be temporary. To have an ongoing effect of keeping price up or holding it down, the government must have an ongoing larger demand or an ongoing larger supply.
To determine whether or not a government is manipulating its currency, then, one would have to know the world volume of trade in its currency for the foreign currency and the government’s volume of trade in its currency for the foreign currency. As you might suspect, unlike the former the latter is not public information.
Lacking knowledge of the Chinese government’s actual participation in foreign exchange markets, we as outsiders are left to speculate among the logical possibilities. Maybe the Chinese government is massively (see below for how massive it would need to be) intervening in the foreign exchange markets for its currency. But maybe, the merchandise trade deficit America runs with the Chinese and its matching capital account surplus are merely reflections of preferences Americans and Chinese have. And maybe the exchange rate is being driven by some combination of government manipulation and market forces.
Here is a chart of China’s currency exchange rate against the USD:
http://www.exchangerates.org.uk/USD-CNY-exchange-rate-history.html
If you click on the “5 year” button, you can see that the Chinese currency has traded in a rather narrow band of 6.6 to 6.0 USD.
Here are China’s Foreign exchange holdings:
http://data.worldbank.org/indicator/FI.RES.TOTL.CD
For the last five years, the Chinese holdings of assets for conducting foreign exchange trade have steadily increased.
Here is foreign exchange trading worldwide:
http://www.bis.org/publ/rpfx13fx.pdf
As you can see, foreign exchange trade is huge. The average volume of trade each day in April 2013 was $5.3 trillion. The USD-CNY volume of trade was 2.1 percent of the total or $111 billion per day.
If the Chinese government is selling its foreign exchange reserves (which are around $3.7 trillion) to support pegging its currency to the USD at 10 percent of the market (i.e., $11 billion a day), it would exhaust its entire holdings in just one year. If the Chinese government is hoarding up its foreign exchange holdings to support pegging its currency to the USD at 10 percent of the market, it would double its entire holdings in just one year. As noted above, however, Chinese foreign exchange holdings have slowly increased over the last 5 years.
There is one other point to note. Under certain conditions, a government could manipulate other participants in the foreign exchange markets to increase their demands or supplies and thereby, avoid doing its own buying and selling. As a superpower country, The U.S. government did this to other countries under Bretton-Woods. Some commentators claim that the Chinese can scare foreign currency traders into inaction by threatening to counter their trades using its own huge foreign reserve holdings. If the Chinese government is doing this, however, there is no way for an outsider to know it. We must speculate from the evidence we have, which is always open to different interpretations.
ParticipantThe most volatile sectors of the economy over the boom-bust cycle tend to be higher-order capital goods, mining and other extraction industries, for example. Prices of basic commodities vary more than basic consumer goods.
The reason is that demand for raw materials increases disproportionately to the increases in demand for lower-order goods. Consider the following stylistic example. Suppose cheap credit during the boom stimulates demand for cars, which then increases demand for steel, which in turn increases demand for iron. Additionally, however, cheap credit makes the production of new auto factories and steel factories viable. But to produce more cars and more factories increases the demand for steel which increases the demand for iron. Finally, the demand for iron to produce non-steel products may also be increasing, or at least not decreasing.
Of course, this is just a general tendency, one might find that cheap credit increases the demand for a particular consumer goods and thus it’s production more dramatically than the production of some unrelated higher-order good.
Here are a few items:
ParticipantHere are a few items:
https://mises.org/library/freedom-inequality-primitivism-and-division-labor
https://mises.org/blog/how-feds-got-all-western-land-and-why-its-problem
http://www.independent.org/newsroom/article.asp?id=8644
http://www.independent.org/store/book.asp?id=84
http://blog.independent.org/2016/01/15/time-to-privatize-federal-public-land/
http://www.capitalism.net/Environmentalism’s%20Toxicity.htm
ParticipantI suggest taking a look at a few articles on big Pharma:
https://mises.org/library/drugs-good-bad-and-ugly
https://mises.org/library/pharmaceutical-prices-patents-and-fda
ParticipantHere are a few studies you might look at:
http://www.prb.org/pdf08/63.2uslabor.pdf
ParticipantThe main use Rothbard makes of elasticity of demand is to show that the seller’s revenue is largest at the unit elastic point of a linear demand curve. If a seller asks a price high enough, the quantity demanded by the buyers will be zero and the seller’s revenue will also be zero. If the seller asks a zero price, the quantity demanded by the buyers will be a large as possible, but again the seller’s revenue will be zero. As price is continuously reduced from its highest level, the seller’s revenue will continue to increase as one moves down the demand curve, revenue will be largest at the mid-point of a linear demand curve, and then revenue will decline as price continuously falls past the mid-point until revenue is zero at a price of zero. It follows that a seller who has already produced his product, will ask a price at the mid-point of the demand curve for his product to maximize his revenue, i.e., he will neither raise nor lower his price from that point because doing so will lower his revenue.
In the chapter on monopoly, Rothbard goes over Mises’s argument concerning the alleged harm of a monopoly seller in which Mises points out that a monopoly seller will raise price and restrict output (thereby allegedly harming consumers in comparison to a competitive seller) only if the demand for his product is inelastic at the competitive price. If when the seller becomes a monopolist he is already charging a price at the mid-point of the demand curve for his product, he will not raise his price and restrict his output sold. Having a monopoly position, according to Mises, is a necessary but not sufficient condition for the monopoly to act in ways that violate consumer sovereignty.
ParticipantOne simple way to think about the issues is to contemplate your questions with respect to changes in the division of labor among the states in the U.S. Are Pennsylvanians really worse off because manufacturing jobs have moved to Georgia, South Carolina, and Alabama and been replaced by jobs in healthcare. Pittsburgh was filthy and depressing in the 1970s during the heyday of manufacturing. Now it’s largely a service economy, clean with burgeoning culture. If Pittsburgh would have put up tariffs against manufacturing imports from the South isn’t it obvious how this would make Pittsburghers worse off, including those in manufacturing since they would be selling to customers who were poorer because they couldn’t sell as much to outsiders (and, of course, outsiders will not buy Pittsburgh manufactured goods since Pittsburgh manufacturers are inefficient and so ask higher prices.) Isn’t it obvious, that the others who were being harmed by the tariffs would simply move out of Pittsburgh or invest outside of Pittsburgh further lowering the standards of living of those remaining in Pittsburgh, including the workers in manufacturing.
The recent dip in manufacturing jobs in the U.S. is the result of the liquidation of malinvestments during the boom which ended in 2007. Here are the numbers:
http://data.bls.gov/timeseries/CES3000000001
After hitting a trough in 2010, the number of manufacturing jobs has been steadily increasing.
If you look at manufacturing jobs post WWII, you can see that they have risen from around 12 million right after the war to an average of around 17.5 million from the late 1960s to 2000 then they fell until 2010 and have since risen back to around 12 million.
http://data.bls.gov/pdq/SurveyOutputServlet
Finally, in the same way that you assert the superiority of manufacturing jobs over service jobs, some once asserted the superiority of agricultural jobs over manufacturing jobs. Two hundred years ago, more than 90 percent of Americans worked in agriculture, now fewer than 2 percent do so. How has this made America weak or inferior? Isn’t is a sign of strength when workers become more productive, i.e., each worker produces more output.
ParticipantFreer trade allows people to extend the division of labor which raises productivity and standards of living overall. Tremendous wealth has been created by market reforms in China.
http://money.cnn.com/2015/10/14/news/economy/china-middle-class-growing/
The Chinese have been buying American assets and claims to assets. Like any investment, if they earn a rate of return, they will be better off. If they buy physical assets in the U.S. or hold bonds and stocks of private companies, then they will be paid back. Of course, the Federal government may default on Chinese held Treasuries, in which case expect the Chinese government to retaliate in some manner.
Here is a list of foreign holders of U.S. Treasuries:
http://ticdata.treasury.gov/Publish/mfh.txt
Here’s a list of foreign holdings of U.S. assets:
http://www.cfr.org/united-states/quarterly-update-foreign-ownership-us-assets/p25685
Here’s a list of Chinese holdings:
ParticipantThe monetary inflation and credit expansion of the 1920s occurred in three intense episodes in 1922, 1924, and 1927. The resulting asset price inflation, especially the rising stock market, led the Fed to tighten monetary policy in 1929. A few months later, interest rates started to rise. Savvy investors recognized this as the top and sold out of stocks. As they did so, stock prices softened and less savvy investors sold out and so on. So in some cases, the Fed tightens monetary policy to “fight Inflation” and this heralds the financial crisis.
Take a look at Benjamin Anderson on the Great Depression:
https://mises.org/sites/default/files/Economics%20and%20the%20Public%20Welfare_5.pdf
In other cases, like the financial crisis of 2007, the Fed continues expansionary policy even in the face of asset price inflation. Savvy investors still sold out of real estate investments because they recognized the increasing riskiness of further investment in the lines of the boom. As a result housing prices softened, leading less savvy investors to sell out and so on.
Take a look at Lucas Engelhardt on the downturn of 2007:
https://mises.org/sites/default/files/Economics%20and%20the%20Public%20Welfare_5.pdf
ParticipantThe history of labor unions in America is written largely from a Marxist perspective, which is based on the assumption of capitalist exploitation of labor. The true is quite different.
For example, take a look at this history of the coal mine violence in West Virginia:
If anything, the violence escalated because of the failure of the government to defend private property. Consider, a strike means that the labor union uses violence to prevent the employer from hiring replacement workers to continue operations. The government ignores this violation of private property and instead supports the labor union’s false claim to a right to the jobs of its members. When the employer uses force to evict labor union members from his property and employ replacement workers, the government, again, stands by and allows the union to escalate the violence.
Here’s more to read, in general, about the failure of government in labor relations:
ParticipantThere are two ways to interpret the claim that imports are necessary for exports.
(1) When you include money as a good, then it must be true in any trade that the goods “exported” (i.e., given up) are the basis for the goods “imported” (i.e., acquired). This is even true of an exchange of one money for another. So if the Chinese sell their money to buy our money there is still a one-to-one correspondence between exports and imports.
(1) If one divides things into categories (namely: goods & services; money; and capital funding) then the exports of goods and services do not have to equal the imports of goods and services even though the overall movement of everything in all three categories must still balance.
In a market economy, the composition of the balance of trade is determined by people’s preferences. If Americans prefer Chinese goods over Chinese money or Chinese investments and Chinese prefer American money and investments over American goods, then American will have a merchandise trade deficit with the Chinese which is balanced by a capital account surplus. We buy more Chinese goods than they buy American goods and they buy more American money, assets and claims to assets than we buy Chinese money, assets, and claims to assets.
https://mises.org/library/what-trade-deficit-portends
https://mises.org/library/balance-trade
https://mises.org/library/neo-mercantilist-hysteria-over-us-trade-deficits
https://mises.org/library/trade-deficit-austrian-perspective
ParticipantConsider this analogy: suppose your family had a homestead in the American territorial west and, while mostly self-sufficient, your family traded with the merchants in the local town for goods that they could sell more cheaply than you could produce. Then one day the merchants decided to give your family a discount for goods they sold to you because they wanted to expand their own business in these lines (let’s say they are forerunners of the strategy of Sam Walton). By accepting their discounted goods, your family would raise its standard of living by shifting to areas of production in which it had comparative advantage and the producers supplying the merchants would be doing likewise.
ParticipantThe central bank of Brazil has slowed the growth of the money supply recently. It has even shrunk in the lat few months:
http://www.tradingeconomics.com/brazil/money-supply-m2
Domestic price and inflation and international devaluation are not, strictly speaking, inversely related. They are instead, two manifestations of the same phenomenon, namely, the purchasing power of a money.
With the money supply shrinking in Brazil and prices still rising, it must be a collapsing demand for money that is driving up prices. People expect price inflation to accelerate and so spend money more readily. The mainstream refers to this as inflationary expectations. (You may remember when Ben Bernanke was inflating the dollar in the hope, which proved to be vain, that it would ignite inflationary expectations among Americans who would then spend more freely.) As you point out, foreign holdings of Brazilian currency are also declining and their selling of it against other currencies is driving its depreciation.
The last chart in this Bloomberg story shows that price inflation has been running between 6-7% in Brazil since the beginning of 2014 until last summer when it shot up to 9% in the fall and has been between 8-9% since then.
And this Bloomberg story highlights that the monetary tightening has precipitated a recession in Brazil:
March 2, 2016 at 12:58 pm in reply to: Doesn't Keynesianism work when you control the world's reserve currency? #21172ParticipantCorrect, monetary inflation can make some people richer at the expense of others that it makes poorer. What monetary inflation cannot do is make society-at-large richer. In fact, it makes society-at-large poorer.
ParticipantLike other countries, China supports pegs of its currency to other important currencies. China devalues the RMB by moving the peg. It did this last summer:
The effect of devaluation depends on whether it is an adjustment toward or away from the currency’s underlying purchasing power. If the devaluation is moving the currency in line with its purchasing power, then it improves the efficiency of the international division of labor. If the devaluation is moving the currency below its purchasing power, then it leads to a less-efficient international division of labor.
A devaluation means that a given amount of foreign currency will buy more of the devalued Chinese currency and therefore, the foreign currency price of Chinese exports is reduced (because the price of the exported products in the Chinese currency remains unchanged). But, again, whether is is beneficial or harmful to the international economy depends on whether the devaluation brings the currency in line with its purchasing power or pushes it below its purchasing power.
If the devaluation brings the Chinese currency in line with its purchasing power, then efficiency is improved and worldwide standards of living rise. (The Chinese products were over-priced to Americans and under-priced to the Chinese before the devaluation.) If America then places a tariff on goods imported from China after the devaluation corrects the inefficiency, the international division of labor is less efficient.
If the devaluation pushes the Chinese currency below its purchasing power, then the international division of labor is made less efficient and standards of living are lower than otherwise. If America then places a tariff on goods imported from China, the American government receives tax revenue paid from the lowered income of Chinese producers. Therefore, these two policies, the Chinese devaluation and the American tariffs, do not cancel out and render the efficient result of the free market.
China’s prosperity depends on it continuing to move toward a free market economy. Unilateral rollback of government intervention on all fronts and unilateral strengthening of the legal sanction of private property and contract is called for.
As long as the Chinese continue to save, the world’s credit markets will not change and therefore interest rates across the world will not change. Capital markets across the world are integrated. Only is the Chinese quit saving and start consuming will interest rates rise and then not only in America, but everywhere.
Here’s is something to read on international trade theory:
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