Scott Sumner  

Gary Cohn on the Chinese currency

Covenants without the Sword?... The Priority Resolution...

Tyler Cowen recently linked to an interview of Gary Cohn, who will be Trump's top economic advisor:

The Chinese have taken multidecade views on what they're doing. They built up their surplus capital account over many, many years. It is going down. It is undeniably going down, and you can see it in the numbers. They may take some actions in the next few months to deal with that. You know, look, so I believe that they're going to end up devaluing the currency? I do believe they will end up devaluing the currency.
This surprised me, as there are rumors that Trump will name China a currency manipulator on his first day in office. That suggests that Trump thinks the yuan is too weak. And yet Cohn seems to imply the yuan is currently too strong. Here is some more of the interview:
"At the start of 2015 there were three countries in the world that were willing to have a strong currency. The Swiss, the Chinese, and the U.S. The Swiss pulled the rip cord overnight. They just ripped it off and said, 'We are done. We are done having a strong currency. It is too expensive to defend this.'

"And now you have two countries, two countries in the world that are willing to have a relatively strong currency, and it is unsustainable that the rest of the world try and devalue against these two currencies. It is not fair to those two countries. And I think we have got to do something with this. We will never have those real conversations, but if we woke up tomorrow and every central bank in the world raised their interest rates by 300 basis points, the world would be a better place. No currency should move because all the relationships would be the same, but insurance companies would work, pensions would work, savers would work, we would get people out of bank-loan funds, we would get people out of bond funds and they could put their money back in banks and back in government bonds where it belongs."

I don't think anyone will be surprised to find that I don't agree with most of this. He's completely wrong about Switzerland, which actually sharply revalued the franc upward in early 2015, not downward. That's a pretty serious factual error for a top banker at Goldman Sachs. And the Swiss didn't do it because it was too expensive to defend the currency---just the opposite; they were accumulating massive amounts of foreign exchange.

However, this does pretty much confirm that Cohn thinks the yuan is overvalued (a view held by virtually all experts), which is going to create an interesting dilemma for the Trump administration. Will they actually label China a currency manipulator? If so, on what basis?

He also offers a rather strange suggestion that all central banks immediately raise rates by 300 basis points, on the assumption that this won't matter because the relative value of each currency in the foreign exchange markets won't change. This policy recommendation would probably create a repeat of the Great Depression of the early 1930s, which also occurred due to tight money during a period of fixed exchange rates. In other words, I don't believe it's a good idea.

Most of his other comments are pretty sensible---just keep him away from monetary policy.

PS. Regarding this statement:

It is not fair to those two countries.
I think it is fair to the US, but it's not fair to China. I say that because China's excessively strong currency is partly a reflection of US political pressure. In contrast, the strong US currency is entirely due to decisions made by the Fed.

COMMENTS (6 to date)
BC writes:

"we would get people out of bank-loan funds...[and] funds and they could put their money back in banks and back in government bonds where it belongs"

What is this sentence supposed to mean? Bank loan funds invest in bank loans. Why is it better for investors to deposit money into banks for banks to lend rather than for banks to lend and sell the loans to investors? Either way, investors' money is effectively used to fund the loans, right? Similarly, what is the difference between investors buying bonds through a bond fund vs. investing in government bonds? If he is referring to corporate bond funds, why does he think money should go into government bonds over corporate bonds? Finally, why would a 300 bps increase in interest rates cause people to shift money from bank loan funds into banks and from bond funds into bonds?

marcus nunes writes:

I liked the "willing to have a strong currency..."

cove99 writes:

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Scott Sumner writes:

BC, Good question.

Marcus, That's what they all say--because strong sounds good.

Andrew_FL writes:

Easy enough. It's too strong for the Chinese, it's strength is hurting them. It's too weak for America, because Trump et al are working on the theory that the suffering of the Chinese is good for Americans.

Kurt Schuler writes:

I don't think you have the analysis quite right on Switzerland either, Scott. The Swiss central bank did not revalue the franc. Rather, it let the franc float, and market participants then made the franc appreciate.

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