Column

People watch the rain. I hear it.
And that is what I was doing, when she asked “Why won’t you tell me if you think I am beautiful?”
“Didn’t we talk this recently?” I asked.
“Yes, but that does not answer the question.”
“I can’t do better than that. And don’t put me in a Catch-22 situation.”
“A Catch-22? How?”
“A Catch-22 situation is essentially a no-win situation. So if I said you are not beautiful, I would have had it. And if I said you are, I would have to keep finding newer ways of saying that you are beautiful, over and over again.So either ways, I would be in a jam,” I said. “The term comes from Joseph Heller’s 1961 book, Catch-22. The book is kind of a satire on World War II with the major characters being airplane pilots. As Heller writes in the book: “There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr (a pilot and one of the main characters in the book) was crazy and could be grounded. All he had to do was ask (to be grounded); and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane he had to fly them. If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to.” And that’s how the English language got the term Catch-22.”

“Very interesting.”
“Yup. And it’s amazing how many real life situations end up like that.”
“Such as?”
“Such as the fact that a recent report by the US treasury department said China is not a currency manipulator. At the same time, a statement by China’s State Administration of Foreign Exchange, which is in charge of the country’s over $2.4 trillion of foreign exchange reserves, said the reserves will not be used as an “atomic weapon”.”

“Could you explain that in simple English, please?”

“See, for almost two years, Chinapegged the value of the yuan such that a dollar was worth around 6.82 yuan. Only recently has China let the peg go. Since then, the yuan has appreciated and one dollar is now worth around 6.77 yuan.”

“Why did China peg the yuan?”

“China is export-driven. Their main export market is the US. So an undervalued yuan is beneficial to its exporters. This also helps China keep its manufacturing advantage,” I explained.
“So what you are effectively saying is that China is a currency manipulator?”

“Of course it is. In fact, most central banks try and work in a way so as to ensure that the value of their currency against other important currencies around the world is in their favour. But China does it more than the others.”

“So given that, why can’t the US just say China is a currency manipulator?”

“Precisely because there is always the threat of China starting to sell all US the financial securities it holds. If it does that, the status of the dollar as the premier currency in the world will be in danger, as its value will fall. It will also lead to a situation wherein the US government will have to offer a much higher interest rate on its financial securities to continue financing the humongous budget deficit that it currently has and is likely to continue to have.”
“And do you think China will sell US financial treasuries?” she asked.

“Of course not. If China starts selling US financial securities, and in effect the dollar, it will lead to the value of the dollar coming down, which means the overall purchasing power of all the foreign exchange that China holds will also come down. And that is why they specified that they will not use the foreign exchange reserves as an “atomic weapon”.Meanwhile, they need to continue to buy the US government financial securities, to continue bankrolling the US government and its bankrupt citizens to ensure that they continue to buy Chinese goods. Chinese exports in the months of May and June grew by 48.3% and 43.9%.”

“You have me a little confused, V.”

“Well, the US cannot call China a currency manipulator because China is now its biggest financer. China in turn cannot dump the dollar, even though the economic situation of the US hasn’t shown any kind of improvement, because that would be like shooting itself in the foot. At the same time, China will have to continue to buy US government financial securities to support its own exports. But by doing this, it will essentially be postponing what will turn out to be a bigger problem for another day. And so the countries are in a Catch-22 bind — they cannot extricate each other even if they want to. So if the US calls China a currency manipulator, which it is, China can start dumping all the dollars it holds. But China is unlikely to do that because it would decrease the purchasing power of all the dollars it has,” I said.
“Yes, that explains it to some extent.”

“Yeah, and it reminds me of a poem titled Hille Re, written by Gorakh Pandey, and made famous by the band Indian Ocean, which converted it into a song. As the lines go “Hille le Asia re, hille le Americwa, hille saari jagat ki janta…””.

(The example is hypothetical)

References: Catch 22, Joseph Heller, Simon and Schuster Paperbacks