Paul Krugman says Dean Baker is right,
Dean Baker is right: it’s bizarre to report that Chinese officials are (a) worried about inflation and (b) determined not to let their currency appreciate without noting that these are contradictory policies.
What Dean Baker wrote was,
If China Is Worried About Inflation, It Could Raise the Value of the Yuan
A WSJ article reporting on comments by Chinese Premier Wen Jiabao noted his concerns about inflation. Later it discussed the possibility that China would increase the value of the yuan. Remarkably, it never noted that raising the value of the yuan would reduce import prices and therefore offset inflationary pressures.
Krugman says that by pegging its currency to the dollar, which China does in order to make it cost less to manufacture there, which is a form of government subsidy to their own countries, they are causing the very price pressures that they complain of. The currency wants to “float,” which means find its natural level against other currencies, and China won’t let it.
China is basically trying to keep water from flowing downhill. And it really needs to stop.
According to Krugman, “RX = EP*/P,” which clearly settles the matter.
