Dean Baker
TPMCafé, April 11, 2011

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Robert Kuttner reports about the dismal prospects for fundamental economic reform from the Institute for New Economic Thinking's conference at Bretton Woods. His note suggests that the situation may be even worse than he realizes.

Toward the end of the piece he reports a discussion of the need by countries with trade surpluses to share in the adjustment process with countries with trade deficits. He then comments that:

"Nobody here is optimistic that the Chinese, the new surplus power, will allow anyone but the Beijing government to decide China's monetary policy."

Actually, it is possible for deficit countries to impose serious pressure on China to change its monetary policy. The United States Treasury could announce an official exchange rate that values the yuan much more highly than China's official exchange rate. For example, it could offer to sell dollars at the rate of four yuan a piece. This would be a much higher price than the official Chinese rate, which is close to seven yuan to a dollar.

This would provide a powerful incentive for Chinese with any wealth to trade their yuan at the U.S. rate, putting upward pressure on the price of the yuan. Such trades would violate China's laws, but there are wealthy individuals who don't always follow the country's laws (i.e. they have problems with corruption). If many people traded yuan for dollars at this higher value it could make this the new exchange rate.

People like Fred Bergsten at the 100 percent mainstream Institute for International Economics have been floating ideas like this for years. If the new economic thinkers gathered at Bretton Woods haven't even considered such options, then prospects for reform are indeed bleak.

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