China’s asset-buying binge inflated the U.S. housing sector, setting the stage for the global financial crisis, but the Chinese policy of keeping the yuan-dollar rate fixed may be causing an even more harmful economic bubble, says Nobel Prize winner Paul Krugman.
“China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead,” writes Krugman in The New York Times.
China is creating a bubble for its own economy. Krugman says this policy is particularly precarious during a period when the world economy remains deeply depressed due to dampened demand.
“By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere,” writes Krugman.
“The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.”
The U.S. government has been excessively tepid in addressing this issue.
Last week, the Treasury Department testified in a required report to Congress that China is not manipulating its currency.
“They’re kidding, right?” writes Krugman. “The thing is, right now this caution makes little sense.”
Others in the business press are noticing China’s policy too.
Bloomberg News is reporting that the People’s Bank of China has kept the yuan at about 6.83 per dollar since July 2008, after a 21 percent gain during the previous three years.
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