Neoliberalism Has Met Its Match in China

When the Federal Reserve cut interest rates on July 31st for the first time in more than a decade, commentators were asking why. According to official data, the economy was rebounding, unemployment was below 4%, and GDP growth was above 3%. If anything, by the Fed’s own reasoning, it should have been raising rates.

The explanation of market pundits was that we’re in a trade war and a currency war. Other central banks were cutting their rates and the Fed had to follow suit, in order to prevent the dollar from becoming overvalued relative to other currencies. The theory is that a cheaper dollar will make American products more attractive on foreign markets, helping our manufacturing and labor bases.

Over the weekend, President Trump followed the rate cuts by threatening to impose a new 10% tariff on $300 billion worth of Chinese products effective September 1st. China responded by suspending imports of U.S. agricultural products by state-owned companies and letting the value of the yuan drop. On Monday, August 5, the Dow Jones Industrial Average dropped nearly 770 points, its worst day in 2019. The war was on.

The problem with a currency war is that it is a war without winners. This was demonstrated in the beggar-thy-neighbor policies of the 1930s, which just prolonged the Great Depression. Continue reading