The world should stop fretting about currency wars and focus on growth

Currency WarsIt’ll all be over by Christmas. That’s what they said of the First World War. A naïve reading of the G7 statement would lead you to believe last year’s currency wars will have an even briefer duration. “We reaffirm our fiscal and monetary policies have been, and will remain, oriented towards meeting our respective domestic objectives using domestic instruments and that we will not target exchange rates”, collection of central bankers + finance ministers from world’s biggest economies informed us. Note “have been”. What this means is that when Sir Mervyn King said last November that sterling’s recent appreciation was “not a welcome development” he wasn’t targeting the exchange rate. Heaven forbid. That verbal intervention was a response to a damaging and unjustified spike in sterling. This means that when François Hollande said this month “the euro should not fluctuate according to moods of markets” he wasn’t thinking about a lower exchange rate. Oh goodness no. It was about stabilisation. And so on. Here’s another sentence from the statement: “We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic + financial stability.” Spot problem yet? Yes, one country’s proportionate response to harmful currency volatility is another country’s piratical currency manipulation. Currency wars are in the eye of the beholder. That makes the statement, ultimately, a gust of hot air. Japan omission confirmed it. It’s an open secret Shinzo Abe’s government wants a lower yen to boost exports. The strategy was the talk of delegates at World Economic Forum in Davos last month. Japan wasn’t even mentioned in the statement. The currency wars have become a war of plausible deniability. WWI raged for 4 agonising years. Expect the covert currency conflict to drag on too. But does it really matter? For politicians + central bankers to fret about currency wars reflects disordered priorities. Of course, competitive devaluations are a beggar-thy-neighbour game. And, of course, mercantilist currency manipulation by China, which pushed down interest rates throughout the West to unsustainably low levels, is one reason we’re all in this overleveraged mess today. But currency swings taking place now are a symptom of protracted economic weakness across the developed world. Currency movements have mainly been a by-product of quantitative easing schemes designed to boost domestic spending through central bank-asset purchases. Japan’s done it. Federal Reserve has done it. And of course Sir Mervyn and Monetary Policy Committee have done £375bn of it. The only major central bank that has refrained from asset purchases is the European Central Bank, that’s because dogmatic German hard-money types go into meltdown at the mere mention of unorthodox measures which, horrors!, might actually help the eurozone recover from recession. These are not normal times. Under present circumstances of feeble demand and an intensifying global savings glut, governments, central banks should be concentrating on what they need to do to get domestic growth motoring again, not wringing their hands about currency wars. A robust global economic recovery is the only sustainable route to normalising the foreign exchange markets. And a robust global recovery is the world’s only escape from these secret and hypocritical currency wars. (source: Ben Chu – The Independent, UK – 12/02/2013)


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4 Responses to The world should stop fretting about currency wars and focus on growth

  1. The Group of 7 industrialized countries appeared to tamp down talk of a currency war in a statement this week that said markets should determine exchange rates and that countries should use fiscal and monetary policies to achieve faster growth. It may help curb fears that stagnant economies will devalue their currencies to make their exports more affordable relative to competitors. The statement came in response to sharp moves in currencies like the euro and the yen and calls by some Group of 7 countries like France for policies that could lead to competitive devaluations. The yen, for instance, has fallen by about 11 percent against the dollar since the recent election in Japan of Prime Minister Shinzo Abe, who has pushed for economic stimulus and more aggressive asset purchases by the Bank of Japan to fight deflation. Critics say those policies are aimed at lowering the value of the yen, which Mr. Abe’s government has denied. And last week President François Hollande of France proposed that euro-zone nations should adopt a policy to manage the value of the common currency to maintain the competitiveness of European goods. (The euro has appreciated about 2 percent against the dollar and nearly 10 percent against the yen this year.) Such misguided thinking can lead only to chaos and retaliation. If all countries were to competitively devalue their currencies, the result would be a downward spiral that would benefit no one, but could lead to high inflation. Certainly in Europe, altering exchange rates is not the answer; reviving economies will require giving up on austerity, which is choking demand and investment. Developing countries like Brazil and Mexico also complain that looser monetary policy in industrialized nations can produce effects similar to currency manipulation. When central banks in countries like Japan and the United States pump more money into their financial systems, investors are driven to put their money into emerging markets where interest rates are higher. That pushes up currencies like the real and peso, making exports from those countries more expensive on the world market. Instead of responding to this effect by manipulating their exchange rates, those countries could protect themselves from volatile capital flows by regulating them. With much of Europe in a recession, Japan struggling with deflation, and the weak American economy potentially falling back into a recession if the automatic spending cuts go through, the global economy is fragile. The last thing the world needs is a currency war. (source: Editorial – NYTimes – 14/02/2013)

  2. In a concerted move to quiet fears of a so-called currency war, finance officials from the world’s largest industrial and emerging economies expressed their commitment on Saturday to “market-determined exchange rate systems and exchange rate flexibility.” In a statement issued at the conclusion of a conference here of the Group of 20, the finance ministers from the Group of 20 promised: “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes.” In its statement, the group also vowed to “take necessary collective actions” to discourage corporate tax evasion, particularly by preventing companies from shifting profits to avoid tax obligations. For instance, a number of big American companies, including Apple and Starbucks, have come under scrutiny recently for seeking out the friendliest tax jurisdictions. Over all, the statement largely echoed one last week by seven top industrial nations pledging to let market exchange rates determine the value of their currencies. Currency devaluation can be used to gain competitive advantage because it makes a country’s exports cheaper. “We all agreed on the fact that we refuse to enter any currency war,” the French finance minister, Pierre Moscovici, told reporters at the conference, which was held in a meeting center just a short walk from the Kremlin and Red Square. In the statement on Saturday, the Group of 20 pointedly avoided any criticism of Japan, where stimulus programs backed by Prime Minister Shinzo Abe have kept interest rates near zero and flooded the economy with money — leading to a roughly 15 percent drop in the value of the yen against the dollar over the last three months. The Japanese policies, which have reduced the cost of Japanese products around the world, were the primary cause of fears of a currency war. In essence, the Group of 20 expressed a view that loose monetary policy, including steps that weaken currency values, are acceptable when used to stimulate domestic growth but should not be used to benefit in global trade. Critics of that view say that it amounts to a distinction without a difference because loose monetary policies stimulate growth and bolster exports at the same time. The United States has also used a loose monetary approach to aid in the economic recovery, in the form of “quantitative easing” by which the Federal Reserve buys tens of billions of dollars in bonds each month. The chairman of the Federal Reserve, Ben S. Bernanke, who attended the conference in Moscow, gave brief remarks on Friday indicating support for Japan’s efforts. Faster-growing, developing countries like Brazil and China have expressed concerns about the loose monetary policies of more established economies like Japan and the United States. The money created by policies like the Fed’s quantitative easing can prove destabilizing as it enters faster-growing economies. The Group of 20 acknowledged this concern in its statement, saying: “Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates. We commit to monitor and minimize the negative spillovers on other countries of policies implemented for domestic purposes.” As the three-day conference drew to a close, participants did not reach any new agreement on debt-cutting targets. Efforts to reach such a pact will continue at the annual Group of 20 summit meeting to be attended by President Obama and other world leaders in St. Petersburg in September. But while the debt agreement was elusive, the Group of 20 leaders reiterated efforts to work together, promising to “resist all forms of protections and keep our markets open.”

  3. Never mind about North Korea; the talk in some quarters is that the biggest threat to Asia and the rest of the world today may very well be a “currency war,” in which countries race to devalue their currencies in a desperate attempt to stimulate growth. Yet the reality is much different. It is really a debate about how industrialized countries will grow out of their economic malaise, and even the term “currency war” is being misused. That catchy phrase was first uttered by Guido Mantega, the Brazilian minister for finance, in 2010. What he was referring to was actually something more complicated than countries racing to depreciate their currencies, which is what most people refer to today when they use the phrase. Instead, Mr. Mantega was really talking about the United States. The huge quantitative easing undertaken by the Federal Reserve has created an environment of low interest rates and put downward pressure on the dollar while pushing the currencies of other countries up. As they say in physics, every action has an equal and opposite reaction, and the Fed’s actions have pushed hot money into countries, mostly emerging markets like Brazil, with higher interest rates. This creates bubblelike asset prices and spurs inflation. Normally, the response of Brazil or another such country would be to ease its monetary policy and possibly also lower interest rates in an effort to tamp down demand for its currency. The problem is that Brazil has stubbornly high inflation at 6 percent and can’t respond the way the United States could. And that is what is really going on with the world’s currencies. Bigger, more mature countries are responding to their own economic downturns by adopting easy money policies. But the problem is that the emerging market economies can’t respond with similar effectiveness because of their own economic or political issues (…..)

  4. Professor Uziel Nogueira says: Well written and didactic text on the so called currency wars. However, there is one point that deserves further clarification. Mainly, why Brazilian economic authorities are so much concerned about the FED’s easy monetary policy. To begin with, the dollar is a de facto world currency, used globally in pricing trade transactions and central bank reserves. The value of the dollar is the most important price in the global economy. Minister Guido Mantega is NOT concerned about ‘ helicopter Ben ‘ pushing down the value of the dollar and inundating Brazil with US made products. His main concern is huge amounts of dollars coming into the Brazilian financial system and artificially strengthening the currency, the Real. This provokes higher domestic interest rates, triggers inflation and creates asset prices bubble already happening in real state.

    The impact of FED’s extra loose monetary policy today is very much similar to what has happened to Japan during the 80s. At that time, pressured by the Reagan administration, Japanese authorities were forced to revalue the Yen in relation to the dollar. The Plaza accord of September 1985 caused a real state bubble that when pinched, resulted in a financial and economic disaster that Japan never recovered until today. In sum, Brazil 2013 does not want to become Japan of 1985.


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