ChinaUSCurrencies.ppt

China, the US, and Currency Issues Jeffrey Frankel Harpel Professor, Harvard University Chinese Future Leaders, January 29, 2010 Topics to be addressed The US twin deficits Alternative theories The call on China to appreciate the RMB. What is in China’s interest? What is China’s actual exchange rate policy? Shifting power relationships The US deficits improved in 2008-09, but this will again be a temporary reversal,attributable to the US recession (= import quantities ↓ oil prices ↓) Dangers of the U.S. trade deficit Shorter-term dangers: Protectionist legislation, including scapegoating China Rising dependence on foreign investors Hard landing for the $. Long-term dangers: US net debt to RoW now ≈ $3 trillion, and rising. Will lower our children’s standard of living. When the US cuts its deficit, that will mean the rest of the world losing its surplus The longer adjustment is postponed, the harder it will be. Policies to reduce the US deficit Reduce the US budget deficit over time, thus raising national saving. After all, the current account deficit originated in the budget deficit (“twin deficits”). Depreciate the $ more. Better to do it in a controlled way than in a sudden free-fall. The $ has already depreciated a lot against the € other currencies. Who is left? The RMB is conspicuous as the major currency that is still undervalued against the dollar. Critics of the twin deficits view say that the US current account deficit is sustainable. Global savings glut (Bernanke) It’s a big world (R. Cooper; Al Greenspan..) Valuation effects will pay for it (Gourinchas) US as the World’s Banker (Kindleberger…) The US offers superior-quality assets (Caballero, Forbes, Quadrini Rios-Rull, Wei Wu …) “Dark Matter” (Hausmann Sturzenegger) Bretton Woods II (Dooley, Folkerts-Landau Garber) Exorbitant Privilege of $ Among those who argue that the US current account deficit is sustainable are some who believe that the US will continu