The Currency Exchange Rate Oversight Reform Act of 2011, which has recently been passed by the U.S. senate, stipulates in its Article S1619 that the U.S. government is able to address the issue of currency manipulation of China and other nations by means of punitive tariff. This move reminds many economists of the Great Depression that hit the U.S. in 1929.
The decade prior to the 1929 had witnessed a remarkable economic boom, which was attributed to the growth-oriented economic policy, a thriving construction industry, and also strong domestic consumption. The package of economic policies then featured low tax rate on the wealthy, low federal reserves, and oversupply of the currency. Speculators could make their investments with easily available credit funds and thus created a bubble economy. Many people used the stocks in hand to make loans on the mortgage, to purchase more stocks. There was a popular saying before the bubble finally burst, “People all believe the stock price has reached the peak that would never falls down”.
The Don Jones index reached its new high of 381.17 on September 29, 1929, but no one would expect that it would slump to 230.7 one month later. The index further dropped to a record low of 41.22 in July, 1932. And during the 25 years thereafter, the Done Jones index would not see the return of its zenith in September of 1929. Debates on the causes of that horrible depression are still going on today, but most economists have ac- cepted that it was caused by a series of domino effects, listed in the causal order, including the slump of the value of assets, the collapse of banks, the dramatic shrink in credit, and the failure of international trade.
It is also believed that the government policy compounded the wounds to the economy. During May, 1929, the U.S. government began to implement a taxation act in order to raise taxes on agricultural and industrial products. Economists then pointed out its serious harms to the U.S. economy, and had drawn up petitions in 1928, requesting President Hoover to veto on that act. Mr. Hoover criticized the act as “vicious, extorting and disgusting”, but still yield to pressures from business leaders and the Republic Party he represented, and finally signed the bill. This tax act was later legalized on July 13, 1930.
One thing noteworthy is that the Republican Party always represents the interests of the business wealthy, while this currency reform act was first raised by the Democratic Party which claimed to serve for interests of the grass root. It seems that the capitalist democracy would defend interests of the wealthy.
Another incident that might contribute to the collapse of the stock market on October 29 was the rumor about Hoover’s inaction against the taxation act. Trade partners of the U.S. realized that their protests had been neglected, and then had to save themselves by raising taxes. The import of the U.S. plumbed to 1.5 billion in 1933 from 4.4 billion in 1929, a drop by 66%, and the export fell to 2.1 billion from 5.4 billion, a decrease by 61%. The U.S. unemployment rate was 7.8% in

1930 when the tax act was passed, and jumped up to 16.3% in 1931, 24.9% in 1932 and 25.1% in 1933.
It is obvious that the mass confidence crisis, plus the trade protectionist policy, would do serious harms to the economy, especially so during the economic recession. But politicians in D.C. seem to be playing with the fire again. One month earlier they cited the debt crisis to block the fund allocation. Normally raising debt limits would not see too much heated debates, and the acts were passed 7 and 4 times during the tenure of President Bush and President Clinton respectively. But this time the debates had been going on to the last minute before the act was passed, and the credit rating was adjusted to AA+. Standard & Poor stated that “The decision of dropping down the credit rate of the U.S. government is after we considered the U.S. political decisionmaking and administrative efficiency, and we concluded that its stability and predictability have been undermined by the current finance and economic challenges.” The credit rate of the U.S. was now equal to that of Japan, and ironically, last time the dropping of U.S. credit rating happened when the incident of Pearl Harbor broke out.
The currency exchange reform act again shows the caprices of the U.S. politicians. Each year, the U.S. exports to China about100 billion USD and imports from China about 374 billion. This seems a huge sum of money, but it would pale into insignificance when compared with the U.S. annual GDP of 140 trillion USD. Besides, the RMB is appreciating against the USD and the U.S. deficit is reducing.
We should still wait and see whether this act is against China only, or all countries that manipulate currencies. Let us look at some recent cases: Switzerland has just pegged its currency to the Euro at the exchange rate of 1.20; the Japanese Central Bank is printing a huge amount of money (increasing by 183 billion USD during the first three months of 2011) and turns down the exchange rate of yen against USD to 77 from 81; talking of printing money, it is hard to neglect the QE1 and QE2 of the U.S., and also the volume adjustments made by the British and European Union.
It is hard to detect the intention of U.S. politicians from the perspective of economics, because they are repeating past mistakes, discouraging mass confidence, upsetting international trade and doing harm to the economy. Is such an illogical, economy-shaking move to prepare for the general election next year by wooing voters and winning more supporters, or driven by the defense of national business interests by reducing China’s competitiveness?
No matter what the reason behind is, investors are very serious about risks ahead. Let us pray that the history of great depression would not repeat itself, because the turmoil and trauma it triggered still lingers on the heart of everyone.
(Author: Vice President of Hong Kong Anda Consulting Co., Ltd.)