The Great Debate UK
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.
While there was hope that a full-blown war could be avoided, reports were soon hitting the wires that South Korea (the host of this year’s G20 meetings) was back intervening in the FX markets to weaken the won, which has strengthened more than 10 percent against the U.S. dollar since June. Later in the week South Africa joined Brazil, Indonesia and Thailand by announcing measures to stem the value of its currency by loosening domestic capital controls to get money flowing out of the country rather than pumping up the value of the rand, which has appreciated by 12.5 percent against the dollar in five months. So beggar thy neighbour policies are still alive-and-well even after the G20 finance ministers’ show of unity over exchange rates.
If you boil down the currency war to its crudest form then you’ll get emerging market countries with positive financial positions and strong growth trajectories lamenting the weakness of the dollar, which has been falling in value since making a high in June. They are concerned that further quantitative easing from the Federal Reserve will only cause the dollar to fall even further. In contrast, authorities in the U.S. are unlikely to talk up the dollar until they see some meaningful commitment from Beijing to allow the renminbi to appreciate.
from MacroScope:
Did France cause The Great Depression?
Economist Douglas Irwin of Dartmouth College has stirred up a bit of a fuss by concluding in some academic research that it was France, not the United States, that was most to blame for The Great Depression.
Irwin's theory, in a paper posted here by the National Bureau of Economic Research, is that France created an artificial shortage of gold reserves when it increased its share from 7 percent to 27 percent between 1927 and 1932. Because major currencies at the time were backed by gold under the Gold Standard, this put other countries under enormous deflationary pressure.
from The Great Debate:
Quantitative easing and the commodity markets
-The views expressed are the author's own-
A warning by an International Energy Agency (IEA) analyst this week that quantitative easing (QE) risked inflating nominal commodity prices and derailing the recovery drew a withering response from Nobel Economics Laureate Paul Krugman, who labelled the unfortunate analyst the "worst economist in the world".
According to New York Times columnist Krugman "Higher commodity prices will hurt the recovery only if they rise in real terms. And they'll only rise in terms if QE succeeds in raising real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery".
from The Great Debate:
There is no such thing as inflation
In 1987, UK Prime Minister Margaret Thatcher whipped up a firestorm of criticism from her opponents on the left when she told a magazine reporter that "there is no such thing as society", only individual men and women, and families.
The interpretation of those comments remains fiercely controversial. From the context it is not certain the prime minister was clear what she was trying to say.
Does the world need more QE from the Fed?
- Kathleen Brooks is research director at forex.com. The opinions expressed are her own -
The minutes from the Federal Reserve’s September meeting seems to suggest that more quantitative easing is a done deal for November. So far, the argument has centred on whether or not the U.S. economy needs another shot in the arm from the Fed to boost growth. The Fed certainly thinks it does. According to the minutes “many” members felt that the status quo – sluggish growth, inflation grinding lower and no sign of a recovery in the jobs market – was enough to justify more easing in policy.
from The Great Debate:
Fed is banking on phony wealth effect
The Federal Reserve is committed to enticing Americans into doing once again what worked out so badly in the last decade: spending the phony paper gains engineered by overly loose monetary policy.
That, at least, is the very strong impression given by a speech by Brian Sack, the markets chief of the New York Federal Reserve, a man whose job it will be to implement the second round of large-scale quantitative easing coming after the elections in November.
Regulatory gaps let banks off the bonus hook
– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By Peter Thal Larsen
Investment banks have reined in their worst pay excesses. But inconsistent enforcement of bonus rules in the United States and Europe means some are still getting away with bad behaviour. If banks and regulators can’t agree common standards, they risk another political backlash.
Greenspan and the curse of counterfactual
- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
Suppose that, instead of appeasing Nazi dictator Adolf Hitler at Munich in 1938, Neville Chamberlain had taken Britain to war, what would today’s history books say about the episode?
from The Great Debate:
Tightening underway, Fed a passenger
A tightening in financial conditions is under way but its principal architect won't be the Federal Reserve.
Far from it, the Fed will be pinned down by powerful disinflationary, perhaps even deflationary, forces, making it very unlikely to be willing to raise interest rates any time soon.
from Breakingviews:
Markets right to take Fed move badly
The Federal Reserve deserves some sympathy. The U.S. central bank did everything it could to stage-manage its minimal tightening moves, announced late on Feb. 18. But markets reacted as if to serious bad news.
The changes really are small. The main one was to increase the Fed's discount rate, which is not currently crucial to the financial system, by a token quarter of a percentage point. That widens the spread between the policy interest rate, currently zero, and the discount rate, which is used for emergency lending to banks, to half a percentage point. Before the crisis, the gap was a full percentage point.
