lifestyle leader

Avinash Pursaud is clearly a bright and well-respected chap. His list of positions ranges from Chairman of this, Member of the Board of that, Co-chair of another thing to Emeritus professor of whathaveyou. All the more confusing, then, when he writes the following in a VoxEU article entitled "Why China's Exchange Rate is a Red Herring":

China held to the same exchange rate peg to the dollar for ten years up to 2005. Under a fixed exchange rate, a country only develops increasing trade surpluses as a result of improving price competitiveness. Of course, for your average American voter familiar with floating currencies, the whole idea of a fixed exchange rate smells of manipulation, but in fact it is easier to "manipulate" a floating exchange rate than a fixed one.

The US will deliberately pursue a policy of a loose monetary policy, partly in order for the dollar to weaken and US exports to grow at the expense of others. Many Europeans would like their central banks to follow a similar path.

This US policy was precisely the kind of beggar-thy-neighbour currency manipulation the IMF was set up to avoid. Instead the IMF is questioning whether a pegged exchange rate is manipulative. Welcome to doublespeak.

This is either very confused logic or a fabulous piece of contrarianism (and I am the one who is confused).

A fixed exchange rate is by definition a form of manipulation - although not necessarily in the negative sense that is being used here. You are choosing a price for your currency, relative to others. China has chosen a price for their currency that is widely considered to be cheaper than it would be under a floating system - this gives China's exporters a competitive advantage.

Pursaud is suggesting that a flexible/floating exchange rate can be manipulated as well. The central bank sets interests rate low - which makes money cheap - and therefore US goods become more appealing. This is therefore "manipulation." I see a few problems with this logic:

1) If the US suddenly starts exporting a lot more, the importers will need US dollars to buy the goods and services in question. If the demand for the dollar goes up, a floating exchange rate will allow the price (exchange rate) to adjust as well. This is precisely what is not being allowed to happen with the Chinese yuan.

2) Pursaud argues that "Many Europeans would like their central banks to follow a similar path". So what? This is the beauty of an independent central bank: politicians wishing something doesn't make it so. You cannot easily manipulate what you do not control.

3) Pursaud accuses the US of using loose monetary policy to manipulate their currency to stimulate exports. Trouble is, the US had loose monetary policy for most of the last decade - the same period in which they ran up a huge trade deficit. When Americans have access to cheap money, they spend it on shit from other countries. How can you accuse the same set of policies of going about creating both a current account deficit and a current account surplus? Doublespeak, indeed.

The currently "loose" monetary policy in the US is first and foremost an attempt to prevent the economy from going down the toilet. For such policies to continue after recovery is underway risks stoking inflation - that is something I doubt the Fed will allow.

I want to make clear that I agree with the tone of Pursaud's article - he is right that the popular press is overly-focused on China. This is not simply a case of China the big, bad currency manipulator; Americans need to start saving more money and producing more stuff to create more balance in the global economy. But in his attempt to drive this point home, Pusaud seems to have become lost along the way.