At least the Treasury doesn’t focus on “intentions”

Here is the Treasury’s list of the three criteria it uses to identify “currency manipulators”:

Pursuant to Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, this section seeks to identify any major trading partner of the United States that has: (1) a significant bilateral trade surplus with the United States, (2) a material current account surplus, and (3) engaged in persistent one-sided intervention in the foreign exchange market. Section 701 requires data on each major trading partner’s bilateral trade balance with the United States, its current account balance as a percentage of GDP, the three-year change in the current account balance as a percentage of GDP, foreign exchange reserves as a percentage of short-term debt, and foreign exchange reserves as a percentage of GDP. Data for the most recent four-quarter period (January to December 2016, unless otherwise noted) are provided in Table 1 (on p. 13) and Table 2 (below).

This is obviously beyond stupid.  (Since when do bilateral trade deficits mean anything?)  But at least the Treasury doesn’t try to read minds, and interpret the intentions of other countries.

Matthew McOsker sent me an article from the Economist, which nicely illustrates the confusion surrounding the concept of currency manipulation:

Awkwardly for America, two of its friends in Asia have recently scored more highly than China: South Korea and, most clearly, Taiwan. But the highest score of all goes to Switzerland, by dint of its whopping current-account surplus and its hefty foreign-currency purchases. This illustrates one of the method’s flaws: in terms of the goods and services that it can actually buy, the Swiss franc is in fact among the world’s most overvalued currencies.

This is why it’s so important to have a clear definition of currency manipulation.  The Economist clearly thinks the concept is related to undervalued currencies, and most people probably agree.  But whether a currency is “undervalued” is completely unrelated to whether some of the other criteria are met, such as large purchases of foreign exchange and/or a current account surplus.  If you really believe that large purchases of foreign exchange and a big current account surplus constitute currency manipulation, then you should have the courage of your convictions and label Switzerland as one of the world’s worst villains.  After all, it is among the world’s leaders in both categories.

And this leads to another irony.  I frequently point out that the more conservative the central bank, the bigger the balance sheet as a share of GDP. Thus in the future we may end up seeing more and more countries like Switzerland, with huge purchases of foreign assets in a futile attempt to prevent their currency from appreciating.

To avoid being labeled a currency manipulator, they may instead choose to buy domestic assets (as in Japan).  This will also boost domestic saving, depreciate the currency and increase the current account.  But since they won’t be buying “foreign exchange”, they just might fool the US Treasury.  (It’s not hard, when the Treasury is hamstrung by the silly mandate given to it by Congress.)

Here’s another irony.  Some people seem to think that fixed exchange rate regimes are evidence of currency manipulation.  But in the 1990s the EU had a fixed exchange rate system with the express purpose of preventing currency manipulation.  In fact, fixed exchange rate regimes determine the path of the nominal exchange rate.  But if currency manipulation happens at all (I doubt it), then it surely relates to real exchange rates. Thus if currency manipulation happens, it is equally likely to occur with a fixed or floating exchange rate regime.  Indeed you don’t even need your own currency to “manipulate” your real exchange rate.  Germany depreciated its real exchange rate in the 2000s.  If Wisconsin wanted to depreciate its real exchange rate it could do so.

But why would they want to?



21 Responses to “At least the Treasury doesn’t focus on “intentions””

  1. Gravatar of major.freedom major.freedom
    29. August 2017 at 21:27

    A currency manipulator is anyone who utilizes non-market means to affect the supply of currency.

    This definition includes criminal underground counterfeiting operations, and the territorial monopolistic counterfeiting operations hilariously called “central banks”.

    Sumner, if you want a definition, there it is.

  2. Gravatar of Major.freedom Major.freedom
    29. August 2017 at 21:45

    So called market monetarism is just one among many political strategies in currency manipulation.

    Ancient Roman tyrant Diocletian manipulated the Roman currency by debasing the coins with inferior metals, and garbage paper debt instruments, all maintained by legal, indeed lethal, force.

    Summer wants today’s counterfeiters to do the same, but the counterfeiters need a “stable” rule based printing operation. They cannot just print willy nilly. They need to print willy nilly until an arbitrary number of people conducting business on
    land encircled by an arbitrary sized border, bring about the spending on an arbitrary set of goods and services in such a way that it rises by an arbitrary percent over time. Then stick to that rule, and eternal bliss will be had forever, but I can’t say it that way for obvious reasons so I will instead just say there might be a better option, but as an academic I will not explore or investigate it.

  3. Gravatar of Benjamin Cole Benjamin Cole
    30. August 2017 at 02:06

    OT Moody’s raises GDP growth forecast for China

    HONG KONG (REUTERS) – Moody’s Investors Service kept its forecast for G20 economic growth at just over 3 per cent for this year and next, but warned of geopolitical risks, US protectionism and spillovers from global monetary tightening and China’s deleveraging measures.

    The ratings agency said surprisingly strong data in the first half of the year prompted it to raise 2017 growth forecasts for China to 6.8 per cent from 6.6 per cent, for South Korea to 2.8 per cent from 2.5 per cent, and for Japan to 1.5 per cent from 1.1 per cent.

    It also expected the euro zone to accelerate in the rest of the year as suggested by robust sentiment indicators and revised upwards its forecasts for Germany, France and Italy.


    Sometime in the next few years, the People’s Bank of China may buy bad debt from banks and shadow banks, basically by printing money, a type of QE.

  4. Gravatar of Matthew McOsker Matthew McOsker
    30. August 2017 at 05:37

    Now that Scott has me catching up on all things currency related, I circled back to the nominal/real question as it relates to “manipulation” or whatever we want to call it. I am wondering how easy it is to manage real exchange rates as the CB has to be able to properly target their inflation rate:

    real exchange rate d/f = nominal ech rate d/f(CPI foreign/CPI domestic)

    So if a country can’t keep their inflation low relative to the foreign country, then manipulating/managing the real exchange rate could be really hard. What if the target is NGDP versus CPI – how does the formula change?

    On a related note the one to watch right now is the Hong Kong US Dollar Peg. We are hiking rates, pushing the peg to the lower end of the allowed band. HK needs to intervene, or it may unravel some other underlying issues – such as real estate values. Will it be a “reason from a price change” moment for HK?

  5. Gravatar of Matthew McOsker Matthew McOsker
    30. August 2017 at 05:39

    FT Article on HK:

  6. Gravatar of Jon Jon
    30. August 2017 at 05:43

    Let’s try this definition —

    A currency manipulator is one who accumulates foreign denominated debt as the asset backing their currency.

    Let’s discuss a three currency example. CBa buys currency C assets, issuing new money to do so. Currency C appreciates in nominal terms relative to A, but doing this causes A to appreciate in real terms relative to B.

    In China the CB manages two currencies. One is a supply of bonds, paying interest. China trades these for dollars. The second is their trade currency which they use standard techniques to manage the inflation rate.

  7. Gravatar of Michael Rulle Michael Rulle
    30. August 2017 at 12:12

    I posted this earlier as well.

    Again, it is almost impossible to know what you are talking about because you seem to have some hidden meaning in your mind as to what manipulation means. Manipulation sounds like a “bad” thing. “Impacting the value of a currency” seems more like a value neutral way of saying the same thing.

    My definition of manipulation (in the value neutral sense) is “any policy conducted by a central bank”.

  8. Gravatar of Doug M Doug M
    30. August 2017 at 12:58

    “the Swiss franc is in fact among the world’s most overvalued currencies.”

    How do you come to that conclusion? For the most part, the market sets the value, and who is to say that the market is wrong. The Swiss have tried to peg to the euro, and IS currency manipulation. The peg broke. That doesn’t make it overvalued. You could say that it was undervalued in the period that they central banks were fighting to hold the peg.

    Yes, I know the value of the CHF “normalized” to some degree in the last two years and took a drop last month. But the “overvalued” comments usually just mean that it is richer than it was in 2014.

  9. Gravatar of ssumner ssumner
    30. August 2017 at 13:55

    Jon, Does it matter whether the purchases of foreign debt are used to “back” the currency?

    Michael. The people who worry about currency manipulation have a different definition in mind.

    Doug, I don’t view the SF as being overvalued, that’s the view of the Economist (which I quoted.)

  10. Gravatar of Benjamin Cole Benjamin Cole
    30. August 2017 at 16:50

    It is an interesting question: why does not the Bank of Japan buy a lot of foreign assets?

    Use the interest on the assets to cut domestic taxes. Same for Switzerland.

    When selling the assets, funnel proceeds back into Treasury, cut taxes more.

  11. Gravatar of major.freedom major.freedom
    30. August 2017 at 18:36

    It has been nearly three weeks since The Nation pushed an explosive memo from the Veteran Intelligence Professionals for Sanity into mainstream consciousness with an article detailing the evidence that the DNC leaks last year could not have been the result of a Russian hack. By continuing to ignore it, the US intelligence community and all the alt left media pundits and politicians who have advanced the Russian hacking narrative are tacitly admitting that they lied.

    Will all the prior blog posts that also advanced this lie, be disavowed by the blog’s author?

  12. Gravatar of major.freedom major.freedom
    30. August 2017 at 18:37


  13. Gravatar of Ben J Ben J
    30. August 2017 at 19:18

    Can I say I am really enjoying how much Major Freedom has transitioned away from being primarily a Rothbard drone, and is now focusing so much more time on being a manic conspiracy-theory-peddling loony? The shtick obviously got tired, so he’s made some new friends on /r/the_donald…

  14. Gravatar of Jon Jon
    30. August 2017 at 19:20


    Yes, a CB being a large net buyer of US financial assets matters.

    PBOC is levered 3:1–it has about 1 T USD equivalent in M0 — about the same M0 velocity of the US before 2007 and 3T USD in assets.

    By shifting the net chinese demand for treasuries outward they goosed the net G&S Deficit promoting the US to disinvest. Very predatory, not explainable by individual Chinese citizen preferences.

    If those 3T in treasuries had appeared on the household balance sheet the conclusion would have been different.

  15. Gravatar of E. Harding E. Harding
    30. August 2017 at 19:37

    Here’s Trump’s speech on the tax reform:

  16. Gravatar of ssumner ssumner
    31. August 2017 at 07:52

    Jon, I fail to see why it makes any difference which part of the Chinese government buys the T-bonds. In either case, Chinese saving rises,

  17. Gravatar of ssumner ssumner
    31. August 2017 at 07:53

    Harding, Why would I have any interest in Trump speech?

  18. Gravatar of Major-Freedom Major-Freedom
    31. August 2017 at 10:17

    Do it for science. Before Trump was President all the celebrities who are now virtue signaling with daily anti-Trump vitriol every day, would have been the first to line up at the Trump Tower for a party. Trump was shmoozing with the Clintons and black rights advocates for years prior to 2016. I’d bet $1000 Sumner would have accepted an invitation as well if asked to speak about what failed monetary economics looks like. If Melania were a democrat, we would be greeted by the alt left media with non-stop praise about her fashion sense, the same way they tried to do it with Michelle Obama.

    It is very amusing to watch Trump Derangement Syndrome in real time. Keith Olbermann has gone full retard already.

    Sumner once said that with social media he can no longer get away with lying for the communist inspired mantra of “the greater good”. Another good lesson is that the Internet never forgets. Even if the criminals and deep state connected outlets like YouTube and Google try to delete and wipe (and believe me, they are trying) facts and news that disprove their fake news narratives, it is never truly gone.

    If a historian in the future were to study blogs during the 2016-2017 time frame, and they read this one, they would find how credulous, naive, and gullible some people can get.

    The Russia hacked the election narrative has been disproven, which is why we are not hearing a peep about it anymore from the organized and coordinated alt left propaganda media deep state complex. It has been over 3 weeks. Daily propaganda for an entire year, then suddenly it vanishes like a fart in the wind.

    The Internet never forgets. Putting feelings above facts and truth never works in the long run. This is the bed you made, now you can sleep in it.

  19. Gravatar of AlecFahrin AlecFahrin
    31. August 2017 at 14:49

    There is a reason even the US Treasury department with Trump as president was unable to honestly designate China as a currency manipulator…
    All of America’s other trade partners would be designated “manipulators” as well.

  20. Gravatar of Jon Jon
    31. August 2017 at 16:44

    Which part of the government ? Or the government vs the people?

    In this case the government is choosing to hold a large portfolio that is not at market weight, using leverage to do it. At least if households did it it wouldn’t be policy; it would be endogenous.

  21. Gravatar of ssumner ssumner
    31. August 2017 at 20:13

    Jon, I’m confused. Are you now saying that any part of the government counts?

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