Audio Transcript:

Lisa Mullins: I'm Lisa Mullins and this is The World. President Barrack Obama arrived in Seoul, South Korea today He's resting up before tomorrow's meeting of the G20. The balanced grouping of developed and developing countries gets together every year to try to promote financial stability and keep the global economy humming. But this year's meeting takes place amid tension over two things: One is China's interventions to keep the value of its currency low. The other is the US Federal Reserve's recent decision to pump six hundred billion dollars into the US economy. Stay with us now because we are going to be checking with Simon Johnson, an economist who speaks in plain English. He teaches at MIT's Sloan School of Management and he also served as Chief Economist for the International Monetary Fund from 2007 to 2008. He says the current tensions stem from the way China values its official currency the Yuan.

Simon Johnson: China has been keeping its exchange rate at a relatively low value. That means that the Yuan is weak relative to the dollar. That's bad news for Chinese tourists when they go shopping overseas, but, it really gives you an edge if you are a Chinese exporter. It means they can sell more goods at lower prices into the United States. And by the way, around the world. This means, I'm afraid to say, jobs. There are jobs they have taken from the United States through this policy. Not a huge number of jobs, but right now, a couple hundred thousand jobs would be very nice to have in the United States. That's why this is such a hot, sensitive, political issue.

Mullins: So what the Federal Reserve and the US has done is to put more money into the United States economy to try and create these jobs that you are saying it so desperately needs right now. How would that work?

Johnson: The Federal Reserve is embarked on this new phase of so called Yuan. They are trying to lower interest rates at a three year, five year or ten year horizon.

Mullins: And just to clarify, Simon, how does flooding the US economy with dollars bring down interest rates?

Johnson: Well interests rates are in their essence is the outcome of Yuan or money, loans, credit. And the Federal Reserve is basically providing more credit at a three year and five year maturity, is going to push down the price of that credit as they're pushing down the interest rate that you or I or your listeners pay on their mortgages.

Mullins: So, by flooding the market, I wonder if the United States is doing just what it accusing China of doing: something that has obviously really ticked China off.

Johnson: The Chinese perspective is undoubtedly the US is engaged in just the same kind of activities and it is criticizing China with regards to it.

Mullins: Manipulating the currency.

Johnson: Well, no. US dollars really float. There is not a fixed rate and we can't manipulate our currency as the Chinese do, but the Chinese feel that this pulling down of the interest rate by the Federal Reserve will weaken the dollar and give the US a competitive edge. And that is, of course, exactly what Chinese exchange rates Yuan.

Mullins: Are the Chinese accurate in saying the US is doing just what it is accusing us of doing?

Johnson: No, they're not. There are legitimate and less than legitimate ways of handling your economy and there are long standing rules and norms about this. What the Chinese have been doing, I'm afraid to say, most of the last decade in respect to their exchange rate is not generally considered acceptable. US on the other hand has very high unemployment. If you want unemployment to come down, which is a legitimate goal and legal requirement of the Federal Reserve under the Federal Reserve Act, then you need to so something. And that is what the Federal Reserve has done.

Mullins: How could it be and what does it mean if China's leading state endorsed rating agency, and that part of it is important, has downgraded the United State's credit rating, but the US is still supposedly a strong credit risk? How do we know which is correct?

Johnson: Well, you look at the market and you look at the market interest rate and you look at what other people, non Chinese States, people are doing around the world. And there I think the evidence is overwhelming that the US is still regarded as a safe haven and the US dollar still has a lot of confidence. The Chinese are playing chess with us and they just made a very aggressive and I think somewhat risky move. Let's see how the president responds.

Mullins: And what would be in your view an appropriate response by the president?

Johnson: I think the president should mobilize a coalition of people around the world to put more pressure on China and the exchange rate, increasing other countries such as Brazil, such as India, even such as Russia, feel the consequences of China maintaining an unfair exchange rate. So, it's not US versus China. It's a lot of countries around the world that have legitimate concerns. And it's not a matter of complication or currency warring and any other language that goes over the top. This is what economic diplomats are supposed to be able to sort out. And the president has a lot of other people in the world. There is responsible people who are on his side if he asks for their help.

Mullins: Simon Johnson, professor at MIT's Sloan School of Management. Thank you, Simon.

Johnson: Thank you.