Lars Christensen, in a very good post, makes four distinct observation. First, China and the U. S. are in a de facto currency union. That is something that policy makers here have completely failed to take into account, one of the many reasons why policy here has been so flawed.
Second, it is not a good policy union. I wish he had fleshed this out more in the post. I suspect that it’s suboptimal for several reasons including drastically different fundamentals in the two economies and policies that are pulling in opposite directions.
Third, China should de-peg. I think this has been obvious for a decade but the Chinese authorities have clearly seen it as being in their favor to leave the two currencies semi-pegged, so why the heck not?
Fourth, the Fed should not increase interest rates. His argument is, essentially, that the Chinese economy may well circle the drain if the Fed doesn’t postpone its rate increase. I can only speculate he’s making a “stay with the devil you know” argument, i.e. a stability-based argument. We haven’t been doing stability lately.
Somewhat related, I found this piece on The Corn Wars between China and the U.S intersting, but a little long and overstated. The big take-away is the U.S. used the FISA courts to nab a gang of Chinese nationals who were sneaking corn seeds out of the country through various means. Also, I suspect one of the events described strongly suggests a serious internet security breach — these Chinese nationals showed up in the middle of nowhere asking to watch a farmer plant corn, which just happened to be an experimental and top-secret seed under development by DuPont Pioneer.
The article overplays the national security issues though IMHO; this is probably government assisted theft of information about trade secrets, if not trade secrets themselves, to which the U.S. is using tools probably intended for national security purposes, even if national security is not necessarily at issue.
The notion of a national security issue related to corn stems from the article’s factual, but misleading, claim that “approximately 94 percent of all corn imported into China each year.” China has a zero-dependence on foreign grains policy that it does not always achieve, but it comes close: “In 2013–14 China’s self-sufficiency ratios were around 99 per cent for corn, 98 per cent for rice and 97 per cent for wheat.” Link China uses price supports for domestic producers and tariffs against exports; it also ocassionally bans random U.S. food because of GMO issues. The main point though is that China is not faced with a strategic vulnerability because of dependence on U.S. corn.
Because of its peculiar biology making off with corn seed is next to useless if you want to raise competitive crops. What they might be useful for is in coming up with ways to attack the corn crop or break a patent.
Frankly, “break a patent” was my assumption — China is the second largest producer of corn, almost three times the third-place “country,” which is the EU-27.
The Fed question appears to pit what is right for the U.S. economy in isolation from the rest of the world against what is right for the U.S. economy within the context of the world economy. I’m glad I don’t have to make such decisions.