Through The Fly's Eyes: Cafe Lattes In China
Starbucks Coffee Should Be The Determiner Of Exchange Rates
John Rutledge, often a guest on Kudlow & Co, might have found the true way to measure what the exchange rate between China and the US should be. In an excellent piece titled Forget the Renminbi, Revalue the Latte Rutledge compares the price of coffee at a Starbucks in China with one in the US.
Rutledge concludes that one unit of cappuccino in Beijing is 50% more expensive than in the US. "Instead of revaluing the RMB by 25% as the US government wants, my research indicates that China should actually devalue the RMB by 50% to restore Cappuccino Purchasing Power Parity (CPPP) and correct global imbalances."
Rutledge poking fun at Treasury Secretary Paulson's visit to China has a more serious side to it. Having politicians attempting to find ideal exchange rates is a dangerous game. Often theory does not match up with reality. Why would a country with such a lower per capital GDP pay so much for coffee? Another question: Even if one assumes that the RMB is allowed to float, how do we know that it would appreciate in value? Who is going to guarantee that that is going to happen?
These are serious questions. Hopefully Mr. Paulson has given them some serious thought.