The Chinese Fiasco

The twilight receded into the vista of the glowing port lights.  Docked container ships melded into the profusion of overhead cranes.  Sporadic refinery flares overtook the final sparkles of dusk.

The sun slipped beyond the far side of the Palos Verdes cliffs.  We lit a giant bonfire and settled down to its tantalizing flames.  The kindling crackled and snapped.  Sparkling embers escaped in the light onshore breeze.

School’s back in session tomorrow.  But for the under 10-year old crowd we tent camped with last Saturday night at Cabrillo Beach Youth Center, sitting in a classroom was the furthest thing from their mind.  Whittling drift wood, tying bowline knots, and kayaking the breakwater were the tasks at hand.

Our vantage point from Cabrillo Beach in San Pedro, looking back at the Port of Los Angeles and over to the Port of Long Beach, was a sight for reflection.  At this outer peninsula tip the managed chaos of container ships, docks, cranes, semi-trucks and railcars intermingled in harmony.  Each shipping container, no doubt, was overloaded with low priced goods from the Far East for the American consumer.

The vastness of international trade can be best appreciated peering at Terminal Island.  The stakes are high for the world economy these days.  China’s politburo is determined to keep the flow of goods moving.

Gobbledygook

If you recall, China devalued the yuan several weeks ago by 2 percent.  World markets convulsed.  The goal of China’s central bankers in devaluing the yuan is to make their exports cheaper for consumers in the United States and Europe…though they don’t want to cop to it.

Chinese exports dropped 8.3 percent in July.  Obviously, this got the attention of China’s leaders.  Directly finagling with their currency’s exchange rate may help boost exports in the short-term.  But it will also boost economic distortions.

Over the weekend, while we were conducting empirical research at the Cabrillo Beach, Chinese officials took to their state news agency to defend their recent currency manipulations.  Here’s a synopsis, as reported by CNBC

“China on Saturday defended the recent revamp of its foreign exchange regime that led to a sharp devaluation of the yuan, calling it a ‘normal adjustment’.  State news agency Xinhua quoted an unnamed Commerce Ministry spokesman as saying the devaluation will have ‘limited impact’ on the country’s foreign trade.

“The devaluation was meant to correct a ‘relatively large deviation’ between the yuan’s spot rate in the market and the daily midpoint fixing by the central bank, the spokesman said. China allows the yuan to rise or fall a maximum of 2 percent from a day’s midpoint.  The ministry spokesman said a country’s exchange rate hinges on its competitiveness and China’s economic reforms will help ensure the yuan can remain ‘basically stable’ within a ‘reasonable’ and ‘balanced’ level.

The Chinese Fiasco

Here at the Economic Prism we may be a little slow on the uptake.  What we mean is we don’t quite follow the argument.  Neither does CNBC.  Fortunately, they provide some insights we can follow…

“The remarks come on the heels of state media commentaries defending China’s policymaking, showing Beijing’s sensitivity to suggestions it may have fumbled economic policy.  China has billed its currency devaluation as a free-market reform measure, and denies allegations that it has started a round of competitive currency devaluations between governments to help exporters.”

Of course, what China says the rationale behind the devaluation was and what the actual rationale was are two entirely different things.  They may say it had nothing to do with foreign trade.  Clearly, it had everything to do with exports.

The illusion to the central planners in China is that they can whittle their economy like a soft piece of drift wood.  One cut here.  A notch there.  They believe they can sculpt it to their liking.

An economy, however, unlike drift wood, is a complex and dynamic system.  There are no right cuts and carves that will guide you to an owl’s face you can set on your mantle.  Rather for each notch there is a reaction…a consequence.

Before long the owl’s face looks like a dodo bird’s face.  Moreover, instead of a well-constructed economy the planners get something quite different…

They get a fiasco of their making.

Here in the United States the central planners aren’t to be outdone by their Chinese cohorts.  On this side of the Pacific they are working overtime too…putting the final touches on a fiasco of their own.

Sincerely,

MN Gordon
for Economic Prism

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