Economist Paul Krugman says fears that China’s economic problems could trigger a global crisis seem overblown.
“But the fact that people are saying such things is an indication of how out of control the situation looks right now,” Krugman writes in The New York Times.
Unfortunately, China’s currency policy “is a lose-lose proposition, simultaneously depressing employment here and producing an overheated, inflation-prone economy in China itself.”
According to Krugman, the root cause of China’s muddle is its weak-currency policy, which is feeding an artificially large trade surplus.
“One way to think about what’s happening is that inflation is the market’s way of undoing currency manipulation,” Krugman suggests. “China has been using a weak currency to keep its wages and prices low in dollar terms; market forces have responded by pushing those wages and prices up, eroding that artificial competitive advantage.”
“As I’ve emphasized in the past, this policy hurts the rest of the world, increasing unemployment in many other countries, America included,” says Krugman.
Krugman adds that, however fast China is growing, it’s still a poor country, and given its sheer size “it’s well on the way to matching America as an economic superpower.”
Inflation will remain problematic for China in the short-term, but policymakers are poised to respond with tighter lending controls and an appreciation of the nation's currency, says Money Morning editor Jason Simpkins.
“That will help tame a politically sensitive trade surplus with the United States and ensure more stable growth for the world's second-largest economy,” says Simpkins.
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