History Has Already Shown That A Yuan Adjustment Won't Change A Thing

As this is one of the hottest stories of the moment, we thought you should read this post by economist Scott Sumner who points out something very straightforward: from 2005-2008, the yuan was allowed to appreciate by 20%.

And this is what we got:

chart

The current account balance on got worse.

Sumner adds:

In 1985 Paul Krugman (p. 7) argued that the dollar needed to fall sharply in order to prevent chronic CA deficits, which he said would lead to “infeasible” foreign debt levels.  He was right about the dollar, it did fall sharply after 1985.  But we’ve had 25 years of almost nonstop CA deficits, and no sign of a light at the end of the tunnel.  Why?  Because the falling dollar didn’t address the fundamental cause of the CA deficit, a saving/investment imbalance produced by a fiscal regime that is profoundly anti-saving.  You can’t fix that with a band-aid.

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