Tags: Summers | yuan | deflation | dollar

Larry Summers: Yuan Devaluation Raises Risk of Deflation in US

Larry Summers: Yuan Devaluation Raises Risk of Deflation in US
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By    |   Monday, 17 August 2015 07:09 AM

China's devaluation of the yuan is seen as the latest salvo in a global currency war. And it could hurt the United States, a non-participant in the war, says former Treasury Secretary Larry Summers.

The renminbi has dropped 3 percent since Chinese authorities began the devaluation Tuesday. The dollar traded at 6.3939 yuan Friday, up from 6.2086 yuan Monday.

As for the impact on us, “the risks of a deflationary, secular stagnation in the U.S. would be increased by a large devaluation of the renminbi,” Summers, now a Harvard professor, told The New York Times.

The move is deflationary because a weakening renminbi makes U.S. imports of Chinese goods cheaper in dollar terms. And it pressures U.S. exporters to cut their prices in China, because their goods are now more expensive in yuan terms.

To be sure, it's not clear how serious the situation is yet, Summers said. “One has to be very careful about regarding market fluctuations and uncertainty among market participants as a crisis that demands major government interventions.”

As for currency conflict, the eurozone, Japan and many other nations have sought to push their currencies lower in recent years to juice their economies, leading experts to talk of a currency war. And now China appears to have joined the fray.

"When people start talking about 'currency wars,' it's never a good thing," Michael Farr, president of esteemed money-management firm Farr, Miller & Washington, told USA Today. "China's move to devalue its currency could be the first shot across the bow toward a wider currency war."

A weaker currency helps a nation's economy by boosting its exports, as the falling currency makes the exports cheaper in foreign currency terms. But if many countries try to devalue at once, the effect is nullified.

"A currency war is really a race to the bottom, whereby one country after another devalues their currency to gain an export price advantage, creating too much supply and not enough demand, which elevates the risks of even more anti-growth protectionist measures," Joe Quinlan, an investment strategist at U.S. Trust, told USA Today.

"Currency wars are anti-growth and deflationary."

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China's devaluation of the yuan is seen as the latest salvo in a global currency war. And it could hurt the United States, a non-participant in the war, says former Treasury Secretary Larry Summers.
Summers, yuan, deflation, dollar
355
2015-09-17
Monday, 17 August 2015 07:09 AM
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