Back in July 2006 the Wall Street Journal was emailing with Milton Friedman about China and exchange rates and economic policy. Was he worried, for instance, about the low US savings rate? No, he wasn’t.
The right saving rate is whatever satisfies the tastes and preferences of the public in a free and unbiased capital market. Market can adjust to any rate. This is a very complicated question. Present estimates probably understate actual savings because of treatment of capital gains. In any event, the present situation does not raise any problems for the economy.
Did he think China should float the Yuan? Yes, it should.
If they do insist on pegging the yuan, they will sooner or later run into a situation in which they are either accumulating an excessive amount of U.S. dollars or they are in debt for an excessive amount of U.S. dollars and they will have a foreign exchange crisis.
And that, as they say, is not good.
Among other recommendations, Friedman recommended that a computer program run the US monetary policy and that the outlook for India was better than China.
China has maintained political and human collectivism while gradually freeing the economic market. This has so far been very successful but is heading for a clash, since economic freedom and political collectivism are not compatible. India maintained political democracy while running a collectivist economy. It is now unwinding the latter, which will strengthen freedom of all kinds, so in that respect it is in a better position than China.
Milton Friedman: Nobel laureate and great American. Rest in peace.
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