Yves Smith of Naked Capitalism submits:
One of the Treasury Department’s big campaigns has been to put pressure on the Chinese to allow the yuan to float more freely (the Chinese now engage in a dirty float in place of their former hard peg).
Most analyses of the value of the yuan show it to be undervalued, some by as much as 40% relative to the dollar. Congress, unhappy about the huge trade deficit with China, has threatened to impose sanctions if China does not allow its currency to appreciate. (Aside: this desire for a rise in the yuan falls in the category of “be careful what you wish for,” since a lower trade deficit also means lower capital inflows. In other words, kiss cheap foreign funding goodbye).
China responds badly to threats, so Paulson looked to the IMF to act as an honest broker. But that move has backfired spectacularly, with the IMF declaring the dollar to be overvalued. The focus was supposed to be on the yuan and how the Chinese needed to stop meddling; now it has shifted to the dollar, and by implication, our low savings rate (the Chinese have taken the position that it is we, not they, that need to get their house in order). And since the US hasn’t gotten what it wanted, it is now demonizing the very organization it once touted as expert and fair.
Treasury officials recruited the IMF to be a currency cop as China and other countries meddle with exchange rates to gain a trade advantage. Instead, the international lending organization took aim at the dollar, calling it overvalued in an Aug. 1 report….
“The U.S. Treasury has cut the legs from under the IMF before it even started the race,” said Michael Mussa, the IMF’s chief economist from 1991 to 2001 and now a fellow at the Peterson Institute in Washington. “This was foolish and unnecessary when they could have just said nothing.”
By rejecting the IMF’s analysis, the Treasury may have jeopardized its own effort to use international leverage to help narrow China’s $118 billion trade surplus with the U.S. Members of Congress are threatening sanctions if the Treasury doesn’t succeed in getting China to stop suppressing the value of its currency….
IMF staff economists told U.S. officials in meetings ended July 27 that their research showed the dollar was 10 percent to 30 percent overpriced, according to an account included in the 54-page Aug. 1 report
For my money, the richest bit of irony is this comment:
Mark Sobel, a Treasury deputy assistant secretary, told Congress Aug. 2 that, while exchange-rate modeling offers “valuable insights, there is no reliable or precise method for estimating the proper value of an economy’s foreign-exchange rate.”
That was clever. The Treasury has just said there is no way to determine what a currency’s value should be, which means it has no basis for telling China its currency is too cheap. Can we all go home now?