What is currency manipulation and how can a country engage in it.
In: Economics
Having a strong currency makes it cheaper for people in your country to buy foreign goods. The downside to this is that it harms domestic manufacturing, which hurts a country’s long term economic potential.
Having a weak currency helps domestic manufacturing, which helps a country’s long term economic potential. The downside to this is that its more expensive for people in your country to buy foreign goods, so they have less stuff in the short term.
In the modern economic system the only way to manipulate a currency is to restrict the outflows of foreign currency in your country. China is the main country doing this right now, so I’ll just use how they do it as an example.
If you’re a Chinese company that is selling goods to the US, you will be paid for those goods in dollars. But its illegal in China for anyone but the government to own foreign currency. This means when you get paid in dollars you have to turn those dollars over to the Chinese Central Bank. The Chinese Central Bank then gives you Chinese Yuan (the currency used in China) in a set amount based on how many dollars you brought in. The rate of dollars to Yuan is set by the Chinese government completely irrespective of what the international conversion rate between Yuan and Dollars is.
Although the international conversion rate between Yuan and Dollars isn’t particularly relevant either because its *also* illegal to use Yuan to make payments to foreign entities without permission from the Chinese government.
Every year the Chinese government authorizes certain distributions of Dollars and Yuan for Chinese companies to use to make international purchases. However, these distributions are far lower than the currency that the Chinese government is taking in. And these distributions of currency are rarely allocated for anything other than the purchase of raw materials necessary for industrial production.
This creates a situation in which China is functioning as a sort of currency black hole to the rest of the world – money goes in but it never comes out. This reduces the supply of currency in other countries, driving the price of it up (IE – artificially making other currencies stronger).
This is all made possible because the Chinese government is willing to sit on gigantic piles of foreign currency for the indefinite future. This means that it is virtually impossible for Chinese citizens to buy foreign goods, but has been responsible for building up China’s industrial base to the point that its at today.
I mean, when you think about it: literally all monetary policy is currency manipulation, it can just be more or less agreeable to different segments of the population. The ideal for western society in how we see economic growth ought to behave is that income will always grow faster than inflation, and that enough money is printed to create a net inflationary pressure in the economy amid all other inflationary and deflationary pressures.
Disagreeable currency manipulation can be said to be any combination of monetary and fiscal policy which creates an inflationary pressure significantly greater or less than two percent per year. It can also be said to be manipulative if it is made to have an artificial exchange rate set above or below where the market would set it. The market sets it based on the supply of the currency and the value of the size of the fraction of the economy of the country it enables entitlement to, and how that compares with the supply of another currency and the value of the size of the fraction of the economy of the country it enables entitlement to. Like, if we have a GDP of $20T this year, then $2 is equal to “one trillionth of the productive capacity of The United States in 2020.” Because our economy tends to be much more valuable than any other economy, one trillionth of their economy would be far less valuable, so it would trade for less than a trillionth of The United States economy. And since The United States keeps a uniquely low supply of quantas of currency for the size of its economy, a single dollar is worth more than a single quanta of most other currencies.
But countries like China can make deals which encourages a more solid trade partnership. Basically, Yuan, in a free market would be worth a bit more than what the government wants for it: the free market would trade fewer Yaun for 1 dollar if it had to. But China basically gives us a bonus in order to entice continued trade with us, and, ultimately, it is a very good deal for us, from a material standpoint. But, if you live under a brutal capitalist economy who will let go of and piss on obsolete cogs in its machine without a second thought, it can have a bad overall social effect, because exporting Chinese Labor can become more favorable more quickly because you can buy more Yuan to pay Chinese laborers than you could without the artificially cheap currency.
Under reasonable social democracy, we could just create variable redistribution programs to move that imported labor from the hands of the rich to the poor. But we don’t live in a reasonable social democracy because our citizens, especially the ones that our shitty form of government gives extra influence to, are stupid, so they don’t vote for social democracy, and, instead, just keep voting for incoherent personal responsibility memes, and get super pissy when they don’t bear the results they were promised.
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