When Paul Krugman and Niall Ferguson agree on something, it's worth paying attention. In recent weeks, both the liberal New York Times columnist and the free-market Harvard University historian have penned op-eds calling on China to allow the renminbi to appreciate against the dollar. Here's Ferguson:
Right now, Chimerica clearly serves China better than America. Call it the 10:10 deal: the Chinese get 10 percent growth; America gets 10 percent unemployment. The deal is even worse for the rest of the world - and that includes some of America's biggest export markets and most loyal allies. The question is: What can the United States offer to make the Chinese abandon the dollar peg that has served them so well? The authorities in Beijing must be made to see that any book losses on its reserve assets resulting from changes in the exchange rate will be a modest price to pay for the advantages they reaped from the Chimerica model: the transformation from third-world poverty to superpower status in less than 15 years. In any case, these losses would be more than compensated for by the increase in the dollar value of China's huge stock of renminbi assets. It is also in China's interest to kick its currency-intervention habit. A heavily undervalued renminbi is the key financial distortion in the world economy today. If it persists for much longer, China risks losing the very foundation of its economic success: an open global trading regime.
Does Obama have the pull to convince the Chinese that something like the arrangement Ferguson describes is in Beijing's interest? I'm not so sure. Which is why Chinese currency manipulation, which helped fuel the U.S. real-estate bubble in mid-decade, may be fueling a much larger asset bubble today. No one will be happy when it pops.