The Washington Post made yet another contribution to the nonsense about China literature. First we had the "alleged manipulation" of China's currency. This implies that there is some mystery surrounding China's currency policy. What is the mystery? China has a managed exchange rate that keeps its currency below market levels as official policy. What exactly are we looking for here. There is nothing in dispute. Next we are told that Geithner can't really press China about this policy because they may stop buying our Treasury bonds, causing interest rates to rise. This should raise a huge cry of "huh?" If China were to stop "manipulating" its currency, it would have to stop buying U.S. treasuries. These actions are one and the same thing. China keeps down the value of its currency by buying dollars. This is really simple -- supply and demand -- it keeps down the price of yuan by supplying more and increases the demand for dollars by buying up dollars. If we want China to stop manipulating its currency, then we want it to stop buying U.S. government bonds, it's that simple. (The Fed can offset any reduction of Chinese purchases of Treasury bonds by buying more itself.)
--Dean Baker
