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Ben Bernanke is about to play the biggest poker hand in global monetary policy history: The Federal Reserve chairman is trying to force China to fold on its fixed dollar-yuan currency peg. This is high-stakes poker. Although Bernanke will not be sitting at the table to play his quantitative easing card when all the members of the G-20, including China, meet this week in South Korea. Every G-20 country is suffering from an already grossly under-valued yuan pegged to a dollar now falling rapidly under the weight of Bernanke’s QE2. In fact, breaking the highly corrosive dollar-yuan peg is the most important step the G-20 can take for both robust global economic recovery and financial market stability. Regrettably, China continues to believe — mistakenly — that the costs of a stronger yuan in terms of reduced export-led growth outweigh three major benefits: increased purchasing power to spur domestic-driven growth, significantly lower costs for raw materials and energy, and a dramatic reduction in speculative hot flows rapidly pushing up inflation. Of course, the biggest victim of the peg is the U.S which can never eliminate its huge trade deficit with China through currency adjustments. The resultant chronic trade imbalance shaves almost 1% from America’s annual GDP growth rate and costs almost 1 million jobs a year. Europe, with the notable exception of Germany, suffers a similar problem because of a euro overvalued relative to the yuan. Moreover, as the dollar-yuan pair declines under the weight of QE2, the risk of recession in Europe rises. In sharp contrast, Japan has been brought to its knees by China’s fixed peg. Every time the U.S. dollar declines in value and pulls the yuan down with it, Japan (as well as fellow G-20 members South Korea and India) lose more jobs and growth to China. As a further injury, China has aggressively pushed up the yen up through massive interventions in the Japanese market. The commodity-rich G-20 members — Australia, Canada, Russia, Brazil, Indonesia, Mexico, and South Africa — suffer quite a different fate. All are now fighting speculative hot flows, rapidly rising currencies, and the loss of export advantage. The reason: As the dollar-yuan pair falls and commodity prices rise, global speculators are capitalizing on a new, emerging “carry trade” by borrowing at near zero interest rates from the U.S. and then investing abroad in commodities. This long laundry list of G-20 victims brings us back to the perilous poker game the U.S. Federal Reserve is playing. In fact, the refusal of China to allow its currency to strengthen coupled with the failure of President Barack Obama and Treasury Secretary Timothy Geithner to negotiate Chinese currency reform has forced Bernanke to make his own play. The question, of course, at this G-20 meeting is whether China will get the message. Perhaps the biggest obstacle to G-20 success is the mixed message that American policymakers are sending. While Bernanke is clearly signaling the yuan must float, Geithner has decided to tilt at a particularly peculiar windmill: Rather than demand a free market floating of the yuan, Geithner wants trade surplus limits. Such limits are, however, not only economically impractical, which is why most G-20 members have rejected them. Geithner’s own gambit is political suicide because it pushes the Germans right into the Chinese camp. If Bernanke’s gamble fails and the G-20 reaches no rapprochement on the Chinese currency question, the eventual cost may not just be a global currency war. It will likely be a bout of hyperinflation, the likes of which the U.S., and the world, hasn’t seen in almost a century. Peter Navarro, a business professor at the University of California-Irvine, is co-author of “Seeds of Destruction.” |
