Even though Chinese export prices are up 10% from a year ago, the sizable protectionist coalition in Congress is bent on imposing potential tariff penalties for alleged currency misalignment in a vote scheduled in the Senate today. This pre-election year proposal is part backlash against high unemployment and reflective of the near total confusion on Capitol Hill about the way the world’s monetary system works.
Current law already requires the U.S. Treasury to review countries that may be manipulating their currencies to prevent balance of payments adjustments. Senator Schumer’s bill in the Senate tweaks that to use “excessive and prolonged” accumulation of foreign exchange reserves as a ground for decreeing a currency “misaligned,” which sets up the pathway for anti-dumping penalties on that country.
The world dollar standard, not China’s and other governments’ nefarious behavior, is what prevents balance of payment adjustments and creates the buildup of foreign exchanges reserves. When international payments are finalized in dollars, i.e. U.S. national debt, they leave in place an American liability that prevents trade adjustment. That liability usually ends up as Treasury debt parked at the Federal Reserve in custody for foreign governments, the proof of purchase for billions of dollars in extra U.S. imports.
China now has more than $2 trillion of dollar-denominated debt, indicative more of a growing economy’s capacity for this reserve money supply rather than the currency games. It’s been nearly a century since the world had a pact to settle balance of payments deficits and surpluses in something besides national money that wouldn’t leave behind foreign exchange pileups. The international gold standard era of 1873-1913 ushered in the global industrial revolution while predecessor gold and silver standards in centuries before that accompanied diverse economic eras. Yet the drift to the dollar standard was somehow judged as a sign of progress.
That worldview is finally starting to change with the help of a few members of Congress who see through the charade of this all being China’s fault. In particular, Senator Jim DeMint has been a force in trying to turn the debate on its head. Last week he introduced several amendments to the Schumer bill to this effect. One calls for a review of the consequences of the Federal Reserve’s quantitative easing campaign and another eliminates taxes on gold and silver coins declared as legal tender. These seemingly disparate proposals are part of DeMint’s burgeoning program for comprehensive monetary reform, today’s most urgent economic cause.