Thursday, March 25, 2010

Roubini Warns On U.S./China ‘Collision Course’

Fresh from a meeting with Premier Wen Jiabao at the annual China Development Forum, Nouriel Roubini has put out a note to his clients.

The U.S. and China are on a “collision course” over the value of the Chinese currency and investors are underestimating the disruptions for global financial markets, according to  Roubini.

“The risk of a collision course on China’s currency peg and a wider trade rift between the world’s largest debtor and creditor nations has risen significantly in recent months,” Roubini wrote in a note to clients. “Markets do not seem to be pricing in the potential consequences of the U.S. labeling China a currency manipulator, which could be significant even if both sides avoid taking immediate bilateral actions.”

There is a 50 percent chance (whatever a 50% chance means) that the U.S. government will label China a currency manipulator, said Roubini.

That the U.S. continues to harass China for propping up the dollar is quite astounding. Do U.S. officials really want to see what will happen to the dollar and the ability of the Treasury to sell debt overseas, if China stops supporting the dollar.

China's propping up of the dollar is, of course, based on wrong-headed mercantilist thinking that exports are superior to imports. Such thinking by the Chinese government, and the resulting follow-through actions, lowers the standard of living for the average Chinese resident, but is a boost to the standard of living of the average American, who experiences lower prices than would otherwise be the case.

Any "success" the U.S. achieves in getting China to stop propping up the dollar puts the U.S. in danger of much stromger inflation and an inability of the Treasury to raise  money anywhere near the current low rates. Rather than berating China, U.S. officials should do everything they can to keep China's policy in place.

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