Trade imbalances and guess who gets the blame…

Certainly that’s the impression you get after reading this entry from Paul Krugman´s New York Times blog. He says the bill passed in the Senate “would potentially pave the way for sanctions against China over its currency policy” but he believes “U.S. policy makers have been incredibly, infuriatingly passive in the face of China’s bad behavior” and that this bill does not send out a stern enough message to the Chinese.

This view is shared by C Fred Bergsten in this blog entry where we discover that “China has intervened in the foreign exchange markets by an average of $1 billion a day for the last five years, buying dollars to keep them expensive and selling renminbi to keep them cheap, building a gigantic reserve of $2.5 trillion in the process.” to maintain the reminbi’s value.

The graphic below from Spiegel online that goes with this article illustrates the trade imbalances between the US and Europe with China and how China has managed to amass such reserves.

However, the decision by other central banks to weaken their currencies through quantitative easing is regarded by some as hypocritical and a form of protectionism in itself. See Swifteconomics here and Liam Halligan in The Telegraph here for the alternative view.

BBC Business podcast “Currency Wars” from 7 October can be found here.