”Currency wars are necessary if all else fails”
Asian investment in plant has run ahead of Western ability to consume. The debt-strapped households of Middle America, or Britain and Spain, can no longer hold up the dysfunctional edifice. Asians must take over, or it will come down on their own heads.
The countries actively intervening in exchange markets to suppress their currencies – China, Japan, Korea, Thailand, even Switzerland, to name a few – are all too often the same ones that have the biggest trade surpluses with the US.
They are taking active steps to prevent America extricating itself from the worst unemployment since the Great Depression, now 17.1pc on the latest U6 index and rising again.
Each country is doing so for understandable reasons: Japan to avoid a deflationary crisis, China to hold together a political order that is more fragile than it looks. In both these cases they are trapped because they clung too long to a mercantilist export strategy, failing to wean themselves off American demand when the going was good.
Yet this is an intolerable situation for the US. It should be no surprise that Washington has begun to retaliate in earnest, and not just by passing the Reform for Fair Trade Act in the House (not yet the Senate), clearing the way for punitive tariffs against currency manipulators.
The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 `a l’outrance’ to flood your economies with excess liquidity. We will cause you to overheat and drive up your wage costs. We will impose a de facto currency revaluation by more brutal and disruptive means, and there is little you can do to stop it. Pick your poison.
This is what QE2 means, though Fed officials prefer to talk of their “mandate” of supporting employment. It is nothing like QE1, which was emergency action to halt the economic free-fall of late 2008 and early 2009. This time the Fed is using QE as a long-term tool to manage America’s chronic ailments.
Uber-dovish Fed comments over recent days have been enough to send the dollar crashing to a 15-year low of 82 against the Japanese yen, to below parity against Swiss franc, and back to the EMU pain barrier of $1.40 against the euro.
The pressure to revalue intensifies
The 6th of October was a busy day. Apart from being the day that Premier Wen vigorously defended China’s currency policy, the IMF released its latest 238-page World Economic Outlook (WEO).
The report comprehensively assesses the state and outlook of the global economy and made specific policy recommendations. The director of the IMF research department that produced the WEO, spoke to the press. Some excerpts:
“The world economic recovery is proceeding, but it is an unbalanced recovery. It is sluggish in advanced countries and it is much stronger in emerging and developing economies … Many advanced countries, most notably the US, had to rely excessively on domestic demand before the crisis and they must now rely more on net exports. It is a question of sustaining growth for them. Many emerging countries, here most notably China, had relied excessively on net exports before the crisis and must now turn more to domestic demand. These readjustments are essential to maintaining a strong and balanced recovery.”
Nearby, on the same day, at the Brookings Institution, Mr Geithner gave his remarks. Excerpts:
“Growth is very strong in many of the major emerging economies. In the major advanced economies, however, output and employment are still substantially below the pre-crisis levels, and the pace of recovery has been slower, with economic growth not rapid enough to repair quickly the substantial economic damage remaining from the crisis.
“For the recovery to be sustainable, there must also be a change in the pattern of global growth. For too long, many countries oriented their economies toward producing for export rather than consuming at home, counting on the United States to import many more of their goods and services than they bought of ours.”
The similarity of the IMF and US thinking (and their timing) seems uncanny. Both have put forward a compelling case for China to substantially revalue the RMB to underpin the rebalancing global growth. In the follow-up Q&A session, Mr Geithner expressed the belief that if China were to accede to a revaluation of the RMB, other Asian countries would quickly follow suit. This effective devaluation of the US dollar vis-a-vis the currencies of the fast-growing Asian region would indeed be a worthy prize for a US administration looking for more growth, one that had also committed to the American people that it wanted to double US exports in 5 years.