I thought this was a very interesting piece from the German magazine Der Spiegel.
In the U.S. we have tended to view our huge trade deficits very benignly, with one exception: China.
According to Congress, and to many other public figures, the Chinese have unfairly benefited from an undervalued currency which has made U.S. goods in China less attractive.
When viewed from outside the U.S., however, the American position is hypocritical. Quoting from the article:
There is, however, also a fair amount of hypocrisy behind the latest American initiative. Nobody has controlled the currency markets as much as the US has in the past. The US Federal Reserve still continues to print dollars to finance skyrocketing government debt. The fact that this erodes the value of the US currency is something that the Americans seem not to care about. Of course, this makes imports into the US more expensive, but it also makes American exports cheaper and enhances the competitiveness of US companies.
The article also notes the problems that the Chinese face with regards to American demands that they allow the yuan to appreciate:
The Chinese want to avoid at all costs suffering the same fate as their neighbor Japan. After caving in to pressure from the US, in 1985 the former Asian superpower agreed to increase the exchange rate against the dollar. Within one year, the value of the yen had increased by some 60 percent. In order to balance out the negative consequences of the revaluation for the country's export industry, the Bank of Japan lowered interest rates to nearly zero, thereby triggering a huge speculative bubble on the stock exchange and the real estate market. Even today, Japan has still not recovered from the prolonged crisis that ensued.
The pressure on Japan also failed to bring the US much relief. American industries, particularly in the automotive sector, still couldn't effectively compete with manufacturers like Toyota and Honda.
While I continue to hope that cooler heads prevail in the U.S. Senate, and that a ruinous trade war can be avoided, recent political rhetoric seems to make this less likely. It is easier to bash the Chinese than to address the very hard fiscal questions that confront both federal and municipal governments.
The yield on the 10-year Treasury note has plummeted again this morning, and is now trading at 2.40%, the lowest level since January 2009. Yields are dropping on the expectations that the Federal Reserve is going to follow the example of the Bank of Japan yesterday, and aggressively intervene in the credit markets to try to push interest rates lower. While this may help our economy, it surely takes the currency wars up another notch, since lower yields reduce the attractiveness of the U.S. dollar.