The Great Debate UK

Is there a way out of the currency war?

CHINA-USA/CURRENCY-WARCompetitive devaluation is no longer a possible danger – it is already here. Many people are worried that, after global stock market crashes and a collapse of most of the world’s banking system, a war over exchange rates completes a sequence of events that looks awfully like a rerun of the 1930’s. There is however one crucial difference. The Chinese role certainly makes matters more complicated, though it is as yet unclear whether it makes the outlook better or worse.

The key point to understand about the belligerents is this. In the context of purely self-interested beggar-my-neighbour economic policy, devaluation makes good sense for the Eurozone countries as a whole, the British, the Japanese, Swiss, Koreans… for everyone except the Americans. Whether they are deficit countries, like Britain, or surplus countries, like Switzerland, Korea or Japan, devaluation will increase demand for their exports and make their imports more expensive, giving a boost to their output and employment. And if other countries retaliate by counter-devaluation, they can tell themselves that their situation would have been worse if they had not taken the initiative and got their retaliation in first.

By contrast, America’s situation is very different. As long as China keeps its exchange rate more or less fixed, the dollar is not a wholly US currency – it is the currency of two countries, one massively in deficit , and one massively in surplus. The fact that they are separate countries in every other respect makes no difference. De facto, China and USA share a single currency every bit as much as France, Germany, Italy, Greece and the rest share the same currency, the Euro. The only difference is that in the Eurozone everyone uses Euros, whereas in the dollar zone the overwhelming majority use a dollar-certificate, a piece of paper bearing a picture of Mao Tse-tung and exchanging for about 15 U.S. cents.

It is hard to understand why China has voluntarily accepted this arrangement, which forces it to accept whatever monetary policy the U.S. Federal Reserve chooses. In any case, the implication is that the dollar cannot be devalued against one of its most important trading partners, because the two of them are bound together in a de facto currency union. In its desperate attempts to shake China off, like a celebrity trying to shake off a stalker, the Fed is printing more and more dollars, which are used by America’s consumers to buy more and more Chinese exports, thereby sending the new dollars flooding into China to swell the reserves of the People’s Republic, which must now be approaching $3trn.

from Breakingviews:

Beijing’s keep-’em-guessing approach has flaws

Two days before Thursday's strong inflation figures, the People's Bank of China surprised with a rate hike. Global markets sold off, but quickly recovered. The effect of conducting monetary policy through short sharp shocks is waning. It looks time for a well-explained, concerted plan to fight rising prices.

Chinese policymakers favor a keep-'em-guessing approach. The first rate hike in three years came out of the blue, and the central bank remains mute on its reasons. Only annual inflation of 3.6 percent, above the official target, gives a retrospective clue. Similarly, the People's Bank has not explained why it ditched its bewildering practice of moving rates by 27 basis points at a time.

from Chrystia Freeland:

‘We can’t inflate our way to prosperity’

"There is no other policy tool available [besides quantitative easing],"' Laura Tyson, a former chairwoman of the Council of Economic Advisors, said at this morning's Reuters/YouTube live debate on how to fix the economy. Tyson argues that additional Fed purchases of long-term bonds is the most viable way to energize the U.S. economy since a new fiscal stimulus bill is unlikely to pass Congress:

She appears alongside Glenn Hubbard, another former CEA chairman, who maintains the Fed will spend another $1 trillion to lower rates by 20 basis points. "We can't inflate our way to prosperity," he said.

Why the world needs a weaker dollar

IRAN-CURRENCY/RATE/Kathleen Brooks is research director at forex.com. The opinions expressed are her own.

Ever since the last Federal Reserve meeting when the prospect of further policy stimulus for the US gripped the market, dollar weakness has been the dominant theme in FX. The Fed action is considered in some quarters as a backdoor form of currency devaluation, and there has been talk of a global “currency war” as a result.

from MacroScope:

Will China make the world green?

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Workers remove mine slag at an aluminium plant in Zibo, Shandong province December 6, 2008. REUTERS/Stringer

Joschka Fischer was never one to mince words when he was Germany's foreign minister in the late '90s and early noughts. So it is not overly surprising that he has painted a picture in a new post of a world with only two powers -- the United States and China -- and an ineffective and divided Europe on the sidelines.

More controversial, however, is his view that China will not only grow into the world's most important market over the coming years, but will determine what the world produces and consumes -- and that that will be green.

from Breakingviews:

U.S. trade thaw may leave China out in cold

The retaliatory China currency bill passed in the U.S. House helps brand this Congress as one of the more protectionist in years. The next one might switch gears and embrace trade by passing several stalled pacts. But Beijing shouldn't expect that to translate into a friendlier Washington.

A companion bill in the Senate also meant to pressure China to allow a faster rise in the yuan is unlikely to succeed. And it would probably be vetoed by President Barack Obama if it did.

from Chrystia Freeland:

Rise of the rest

Get ready for the next wave of globalization. The emergence of the emerging markets is old news, of course: after all, Tom Friedman discovered that the world was flat back in 2005. But even as much of the developed world is struggling with weak consumer demand and stubbornly high levels of unemployment, the emerging market countries are writing a new chapter in the story of the global economy.

We are accustomed to thinking of our economic relationship with the countries Fareed Zakaria describes as “the rest” as a two-way exchange between west and east or north and south: western companies setting up call centers in India or manufacturing their goods in China, for instance; and, more recently, savings-rich emerging market economies, especially China, investing in US treasuries, or Russian oligarchs buying London mansions.

from The Great Debate:

Speculators and China win big on yen move

What does $4 trillion a day in business, never sleeps and sees Japan's Ministry of Finance as just one more patsy?

The foreign exchange market, of course, which is licking its collective lips as Japan embarks on another round of unilateral intervention to sell the yen in an effort to drive down its value and protect its export-oriented economy.

from Breakingviews:

China’s yuan: a guide for the perplexed

By John Foley and Wei Gu

China's plans to make its currency global could change the world -- if they get off the ground. More international use of the yuan might increase China's trade clout, unseat the mighty U.S. dollar and make a lot of financiers very rich in the process. But it can be hard to separate the facts from the fable. Here are some questions answered.

Why are people talking about an international yuan?

China is the world's second-biggest economy. But its currency doesn't nearly match its size. For most international dealings, China relies on the dollar, which leaves it beholden to the United States. Beijing wants more influence on the global stage, so it has been taking baby-steps to turn the yuan into an internationally used currency.

from MacroScope:

What are the risks to growth?

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Mike Dicks, chief economist and blogger at Barclays Wealth, has identified what he sees as the three biggest problems facing the global economy, and conveniently found that they are linked with three separate regions.

First, there is the risk that U.S., t consumers won't increase spending. Dicks notes that the increase in U.S. consumption has been "extremely moderate" and far less than after previous recessions. His firm has lowered is U.S. GDP forecast for 2011 to 2.7 percent from a bit over 3 percent.

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