This week China was, for a second time, labelled by the United States as a currency manipulator. That’s kinda like accusing the Pope of being Catholic.

There are only three types of countries.

The first group includes the nations who are small economies and would be overwhelmed quickly by any misguided attempt to manipulate their exchange rate. Canada, and most other nations are in that category.

The second are the nations who might try to manipulate, but whose economies are so out-of-balance and artificially distorted that their manipulations are inconsequential. Venezuela fits that bill now, and Mexico did so in the 1970s.

The third category includes nations like ours, and China, and Japan and Russia and the United Kingdom and the European Union that manipulate their currencies daily. They sometimes even do so in a concerted way, such as when the then G6 nations got together to prop up the value of the U.S. dollar as it slid against the Japanese Yen in 1987.

A NARROW BAND

These nations do so for various reasons. For instance, the United States, as the world’s largest domestic economy, has often attempted to moderate inflation by ensuring a strong U.S. dollar could purchase imported goods cheaply. This is an example of a currency manipulation conspiracy. The other nations in the G6 economic club also appreciated a strong U.S. dollar (pun intended) so that the U.S. could more easily afford to buy their goods.

These nations conspired to keep the value of the U.S. dollar within a contrived narrow band so that international economic stability could be maintained.

How did they manage to keep strong the U.S. dollar?

DIRTY FLOAT

Every major economic power with a mature central bank and treasury maintains healthy amounts of various other currencies. Since the abandonment of the Gold Standard, it isn’t the relative supply of gold that dictates the value of one currency, backed by gold, to another. Rather, it’s the flooding of the market to depress one valuable currency to raise the relative value of another. This common practice is called a “dirty float”. All economic superpowers do it.

There’s another way that nations can prop up the value of currencies besides the supply and demand method of open market operations. Nations can manipulate their interest rates, which all central banks do, to some extent.

We are unique among nations in that our financial markets are considered the world’s safe investment harbor. When our interest rates rise, international capital flocks into the United States in search of a better return. These investors must swap their yen or yuan, pesos or euros for dollars. As they do so, dollars are in higher demand and the exchange rate rises.

A DIFFERENT CHINA

Every time the U.S. Federal Reserve adjusts its interest rate, for whatever raison-de-jour, it explicitly acknowledges the inevitable effect on our exchange rate, and the relative price of foreign goods. In abundance concern for uncertainty facing domestic commerce, the Fed factors in its effects on the exchange rate. We’re all currency manipulators now.

China was a different nation back in the 1990s when it was last accused of currency manipulation. Then, China followed in the misguided path of Mexico in the 1970s, and numerous South American countries since, and attempted to artificially increase international sales of its goods by keeping its currency too low.

More dollars flowed into China than otherwise would be the case, and fewer were flowing back here because the Chinese then found our goods too expensive. Nations with central banks more closely allied to their government and economic policy than occurs here can bank the mismatch between these dollars and build up large U.S. dollar reserves.

Over these years, China amassed huge dollar reserves, which gave them clout in international economic circles. These were expensive bragging rights, though, because dollars sitting in a vault in a central bank on Beijing aren’t working to provide a return or earning interest. Money is only valuable when it is spent or invested.

Currently, as China manipulates, it is merely substituting for sagging demand as President Trump’s tariffs take a bite. Yes, they manipulate. But, currency manipulation has become a game with no clean-handed economic superpowers playing anymore.