Greenspan on China Jude Wanniski April 21, 2005

From: Jude Wanniski  <jwanniski@polyconomics.com        
To:      Ben.S.Bernanke@ * * * * *.GOV                                               
Subject: Greenspan on China
11:14 am, 4/21/2005

In his testimony before Senate Budget, Alan for the first time said it was in China's interest to revalue its currency. This is an excellent approach, as it will immediately cause Chinese officials to think in those terms, rather than being beaten up by the Schumer bill to do it at gunpoint. With gold at $334 and China having a much less mature debt structure, it is in China's interest to repeg at something closer to 7.5 yuan to the dollar, or to switch to a basket target. Mundell argues vociferously against going off the peg, because China gets great benefits with the peg because it reduces uncertainties in trade contracts between China and the US, its biggest market. But at some point this benefit is overwhelmed by China importing inflation from the Fed. On the other hand, if there were a few positive measures forthcoming from Congress or the administration... to increase the demand for dollar liquidity... the dollar/gold price could fall on its own and China would not have the burden it has now that Greenspan suggested when he said they should revalue.

If there was a decision to give relief to textile manufacturers, which is always what this come down to, a currency change in China will not help a bit. You cannot change the terms of trade by changing the unit of account. The only thing that would bring relief is a higher tariff on textiles. This would not be bad, especially in this climate where we are talking about raising taxes to produce revenues. I'll talk to Mundell about this tonight.

Jude

PS  Are you going to get back to the gold issue? You said Monday you would pick up on that exchange. Hope so.