The Great Debate UK
Don’t Mention the War!
–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–
Modern wars have no clear start and no clear end, leaving politicians free to deny their existence when it suits them and to claim victory even in the face of obvious defeat.
The same seems to be true of currency wars, judging by the reports from the meeting of the world’s finance ministers in Moscow, who, according to the FT, asserted that “central banks should not target their exchange rates, but added that monetary easing which had the side-effect of weakening a country’s currency was allowed”. This is a bit like saying that bombing civilians is OK as long as you’re actually aiming at terrorists – which, come to think of it, is more or less what we do say.
If you think it is only in the Economics 101 textbook that currency depreciation follows monetary easing as night follows day, then read on: “Shorting the Japanese yen ….hedge funds [have been] reaping billion dollar profits … in January.” The hedge funds had got the message.
U.S. debt downgrade: Who cares?
By Laurence Copeland. The opinions expressed are his own.
As I write this blog, it looks as though the U.S. Congress is going to pass a bill raising the debt ceiling and making modest cuts in Federal Government spending over the coming years. Although it is, quite rightly, being presented as a somewhat hollow victory for the forces of reason, there is one extremely puzzling aspect of the crisis.
It is being reported on all sides that the credit rating agencies may well downgrade U.S. sovereign debt in spite of this “happy ending” – indeed, Egan-Jones, one of the smaller agencies, cut its rating of U.S. debt some weeks ago, and there is much talk of Moody’s and S&P following suit in the very near future.
The U.S.’s big, fat political debt problem
By Kathleen Brooks
The U.S. has practically zero chance of solving its debt problem in the foreseeable future while politicians line up to contest the 2012 Presidential elections.
We have already heard President Obama lay out his partisan cards. He called for Congress to come up with a plan to trim $4 trillion from the U.S. deficit in the next 12 years. His favoured way to do this: end tax cuts for the rich – a well versed refrain from Democrats throughout the ages.
Did the Fed catastrophically mis-time QE2?
The sternest criticism of QE2 is the way it pumped up asset prices like commodities in recent months without making much of an impact on U.S. economic growth. Rising fuel and food costs have weighed on inflation everywhere from emerging markets to the UK. But this criticism might step up a gear if Middle East tensions lead to a spike in oil prices and the Fed tries to protect growth using a similarly blunt tool as QE2.
The political crisis in the Middle East has been the game-changer for the global economic outlook in the past couple of weeks. In just five days WTI oil (U.S. crude) jumped $10, and Brent (European oil) surged to within touching distance of $120 per barrel. This showed us what fear is like: since the 1970’s each recession has been preceded by an oil price shock. You don’t need much more evidence than this to see the extremely close relationship between oil and growth especially in the U.S., the largest consumer of crude in the world.
What to make of the U.S. resurgence
-Kathleen Brooks is
research director at forex.com. The opinions expressed are her own.-
Back in the summer, things in the U.S. were so dire that the Fed had to step in to the breach and boost the economy with a $600 billion cash injection. This was only formally announced in November, yet within two months the outlook for the U.S. economy has brightened markedly. The dollar has had a flying start to the year and appreciated more than 2 per cent against the other major currencies.
Has QE2 worked?
– Kathleen Brooks is research director at forex.com. The opinions expressed are her own. –
Ever since the U.S. Central Bank formally announced its second round of quantitative easing back in November, bond yields have trended higher. Ten-year Treasury yields have jumped by 100 basis points and are back at levels last reached in May 2010. Higher yields underpinned the dollar, which has risen by more than 5 percent over the same time period. So what does this tell us about the market, and has the Fed’s grand plan actually backfired?
Should a country always stand behind its banks?
Ever since the financial crisis broke in 2008 some of the world’s major banks have their governments to thank for their survival. The fates of Royal Bank of Scotland or Citibank would have been much worse without large injections of capital from the UK and U.S. authorities. The UK government pumped more than £37 billion into its largest banks in the immediate aftermath of the Lehman Brothers crisis. Ireland took that a step further when it guaranteed all of its banks’ deposits and liabilities. This was affordable, the Irish government said at the time.
However, this policy failed spectacularly. Ireland’s bailout of its banking sector brought the country to the edge of bankruptcy and forced it to accept a 82 billion euro bailout loan from the IMF/ECB and the European Union. More than 30 billion euros of this loan is to re-capitalise the Irish banking sector and the rest is to shore up the state’s finances. The conditions of the loan mean that Ireland will have to implement harsh austerity measures for many years to come that will inevitably hurt growth.
Thank you, Gordon Brown
–Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.–
If the economics profession has sunk in public estimation in the last two or three years, it would hardly be surprising. Our failure to predict the crisis is something which cannot be simply brushed aside lightly, as some of my colleagues would love to do.
Is the currency war over?
The communiqué from last week’s IMF G20 finance minister’s meeting was the first step in trying to resolve the so-called global currency war. The ministers released a joint statement on October 23 which pledged that all countries would “move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.”
Even fears that the U.S. and China could have a bust-up over the U.S.’s charge that the renminibi is undervalued relative to the U.S. dollar were put to bed when it was reported that Treasury Secretary Geithner popped in to China on his way back from the G20 in South Korea to meet Chinese Vice Premier Wang Qishan.
Is there a way out of the currency war?
Competitive 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.
