George Melloan is a Brilliant Man

George Melloan is a Brilliant Man

July 26, 2005

George Melloan is a Brilliant Man
You need to read George Melloan’s GLOBAL VIEW column on the op-ed page of today’s Wall Street Journal. There are two reasons why I think George Melloan is a brilliant man. First, George mentioned the Rutledge Blog today. Second because, well, he really is. I have known George for about 25 years, since I wrote my first op-ed for him and Robert Bartley on why US rates would fall in spite of budget deficits. He is vastly experienced on both the ideas and the practice of global economics and investing. And he is dead right today to tell the US government to knock off our raging China-phobia before we make a real mess.

As George points out, China’s government has a difficult policy problem. They have to deliver rising living standards fast enough to keep the Chinese people off the streets. There are currently some 200 million migrant workers in Chinese cities who have left their farm and state company jobs in the countryside to do construction labor and other day jobs. Last week’s political disturbances in the Shanghai suburbs should be a reminder that a major stumble in their growth rate could cause problems we don’t want to see.

China’s fixed exchange rate against the dollar was a valuable source of stability for both countries. By pegging against the dollar, the Chinese authorities had essentially outsourced the Chinese inflation rate to Alan Greenspan & Co. And it took both currency and inflation risk off the table for foreign direct investors.

I have made it no secret that I believe forcing China to revalue the RMB was a major policy blunder. But the damage could still be contained. The big question is whether currency speculators will get their jaws around the RMB. Normally, the answer would be “of course they will.” But the RMB is still not freely convertible, which makes speculation slower and more costly. Ironically, last week’s move will increase hot money flows into China and could actually put off the day when China will be able to have a convertible currency with a market determined price.

Still own EPP (pacific ex-Japan) and EWY (Korea) to collect gains in Asian markets from the repricing.

John Rutledge

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