Friday, January 21, 2011

Inflation in China May Cause Price of Chinese Exports to Rise

Krugman has been critical of China's currency manipulation for several years. The low price of its currency keeps the price of China's exports down and the export unemployment to developed countries. He now believes that inflation will undue the impact of their currency manipulation. In 2-3 years inflation will cause the prices of goods produced in China to be at the level of goods produced elsewhere. China has responded to the inflation threat by raising interest rates and using price controls which seldom work well. Krugman believes that China's leaders suffer from the American disease. Instead of doing the sensible thing, letting its currency appreciate in value, it is responding to the inflation threat with policies that will be ineffective.

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