Harvard professor Martin Feldstein, for example, argues that the bilateral trade balance between the U.S. and China is determined by the yuan-dollar exchange rate.
Accordingly, to reduce China's trade surplus with the U.S., he advocates an appreciating yuan.
This advice is nonsense. Trade balances are determined by national savings propensities, not exchange rates. China's savings surplus and America's savings deficiency largely determine our trade imbalance with China. The U.S. Treasury should have learned this lesson after years of forcing the Japanese to adopt an ever appreciating yen, which destabilized Japan's economy without doing a lick of good for trade balances.
Panic Time at the Fed, Steve H. Hanke 05.05.08,
The trade-weighted value of the greenback has fallen 21% since 2001.
So did this weakness in the currency create prosperity or even shrink the trade deficit?
No. Since 2001 exports increased 78%, but imports increased even more, 85%.
This left the trade deficit twice as large in the third quarter of 2007 as it was in the last quarter of 2001.
Steve H. Hanke 02.25.08
Wall Street Journal, August 21, 1998
Only the Dollar Can Rescue Russia, By STEVE H. HANKE
excerpts
... Russians knew the ruble was a junk currency. That's why in 1997 alone, they swapped a whopping $13 billion in rubles for dollars in cash. That amounted to a capital export that exceeded all capital imports into Russia in 1997. At present, Russians hold about $40 billion in greenbacks. That's double the supply of rubles in circulation after this week's devaluation. These figures are truly astounding when you consider that the Yeltsin government officially dedollarized Russia in 1997.
Since legal retail transactions must be conducted in rubles, the Russians' hoard of greenbacks can only be legally used as mattress money... the Russian people have clearer heads than the IMF bean counters.
... Instead of threatening to confiscate dollars, the Russian government should be jumping for joy. Mr. Yeltsin can deliver a quick fix by granting the dollar legal currency status immediately, so that the dollar can circulate and be used on a coequal basis with the ruble. Such a parallel currency system would mobilize the Russian mattress money. That would pump a bit of life into the beleaguered Russian economy. In addition, Russians would be able to choose freely between the ruble and the dollar.
Either this currency competition would discipline the Central Bank of Russia and force it to produce a quality ruble, or the dollar would drive the ruble out of circulation because Gresham's Law would work in reverse: Good money would drive out bad. In both cases, long-suffering Russians would end up with a high-quality currency. A parallel currency system wouldn't even raise ideological eyebrows in Moscow, because both the right and left have employed it successfully before in Russia.
The first time a parallel currency system was used in Russia was during the Russian civil war. The anti-Bolshevik government of the region around Archangel and Murmansk established a currency board in cooperation with its ally, the British government. Rubles issued by the North Russian currency board were fully backed by British pounds sterling and had a fixed exchange rate with the pound. As its initial foreign reserves, the currency board held a deposit in pounds at the Bank of England. The British government provided the deposit as a gift to establish the currency board.
The North Russian currency board was the idea of none other than John Maynard Keynes, then an official in the British Treasury. Keynes's North Russian currency board was the only issuer during the Russian civil war whose currency was stable and fully convertible. Currency board rubles drove the rubles of other issuers--and there were more than 2,000 of them--out of circulation in North Russia because the sterling-backed rubles were a superior currency.
The currency board had a brief life. It lasted only from 1918 to 1920, because the Bolsheviks conquered North Russia and replaced the sterling-backed ruble with their own inconvertible ruble. Nevertheless, while Keynes's currency board lasted, it performed very well under the most trying conditions.
A parallel currency system was also used by the Bolsheviks after they had conquered their foes in the civil war. In the early 1920s, Russia suffered a hyperinflation comparable to the German hyperinflation of the time. To end hyperinflation, the Soviet government, under orders from Lenin, issued a parallel currency, the chervonets, alongside the existing, rapidly depreciating sovznak. Although not fully convertible, the chervonets, introduced in 1922, was backed by a minimum of 25% reserves in gold and foreign currencies.
The Soviet government at first continued to pay some workers with sovznaks, but by 1924 the chervonets had displaced the sovznak so completely that the government ceased issuing sovznaks. The introduction of the chervonets stimulated a remarkable economic recovery. Production of many goods soon reached levels that had not been seen for a decade. Remarkably, the recovery occurred while the sovznak was experiencing hyperinflation. The existence of the parallel, fairly stable chervonets enabled the Soviet people to protect themselves from the worst effects of hyperinflation.
Alas, the stability of chervonets was not permanent. Unlike the sterling-backed ruble issued by Keynes's currency board, the chervonets was issued by a central bank without credibility. Consequently, it fell victim to the discretionary policies of the central bank and became inconvertible in July 1926.
The North Russian ruble and the chervonets were not just economic successes; they were also political successes. The North Russian and the Soviet governments gained popularity by issuing stable currencies. President Yeltsin could also quickly gain popularity for his government by embracing currency competition.
Mr. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore, and co-author (with Lars Jonung and Kurt Schuler) of
"Russian Currency and Finance: A Currency Board Approach to Reform" (Routledge, 1993).
FORBES COLUMNIST DR. STEVE H. HANKE
is a professor of Applied Economics at The Johns Hopkins University in Baltimore. Professor Hanke has been writing a column in Forbes Magazine since 1993, and also advises governments on currency reform, privatization and capital market development.
His appointments have included: Senior Economist on President Reagan's Council of Economic Advisors (1981-82); Advisor to the Minister of Economy, Domingo Cavallo, Republic of Argentina (1995-96); Advisor to the President of Bulgaria, Petar Stoyanov (1997-present) and Special Counselor to the Economic and Monetary Resilience Council, Republic of Indonesia (1998-present). Professor Hanke is a member of the Steering Committee of the G-7 Council in Washington, D.C. and a Fellow at the World Economic Forum in Geneva.
Dr. Hanke's books include: The Revolution in Development Economics (1998), Currency Boards: The Financing of Stabilization (1997), Alternative Monetary Regimes for Jamaica (1996), Currency Boards for Developing Countries (1994) and Russian Currency and Finance (1993).
Capitalism without banks
By Steve H. Hanke
RUSSIA'S PROBLEMS ARE BEYOND solving by IMF loans or devaluations. You cannot run a capitalist system without banks, and Russia has no real banks. The banking system is technically insolvent and has huge off-balance-sheet long ruble, short dollar positions. That's the conclusion of a brilliant new book by Michael Bernstam and Alvin Rabushka, Fixing Russia's Banks (Stanford: Hoover Institution Press, 1998, $16.95). ............. more