Newsweek October 4th 2010
http://www.thedailybeast.com/newsweek/2010/10/04/currency-the-coming-money-wars.html
The Japanese are doing it again. The Koreans prefer to do it when nobody’s watching. The Chinese are at it brazenly and, like everything else they do, on an enormous scale. The Swiss tried it, without much success.
The “it” is interference by governments in the foreign exchange market. The aim? To make their currency cheaper than would be otherwise be the case, thus making life easier for their export industries and harder for foreign companies selling to their consumers. The big question is what this says about the shifting landscape of the post-crisis world.
Historically Western governments were too high-minded to manipulate currencies. That was considered to be the province of third world despots with a limited understanding of economic theory. Even so currency policy in the West has been far from the benign neglect of free market ideology.
In the 1990s, then Treasury Secretary Rubin repeatedly assured the world that a strong dollar was in the US’s interests. Earlier the UK Treasury made the disastrous decision to “shadow the Deutschmark,” linking the pound to the world’s strongest currency. In both countries policy-makers saw currency strength as a symbol of economic virility.
In the context of the times, that made perfect sense. Both countries spent most of the last thirty years living beyond their means. Inflation was relatively high; the natural tendency of the dollar and the pound was to fall. Bolstering confidence in the currency kept the show on the road. It put a lid on inflation and encouraged creditor nations to carry on lending – which allowed consumers to carry on spending and politicians to carry on getting elected.
Meanwhile Asian countries generally tilted the playing field to benefit their exporters – through subsidies, tariffs, and, not least, undervalued currencies. In the 1980s and 1990s the resulting imbalances were contained for two reasons. First they were still small in relation to US economic scale and power. Second the US was the ally and protector of the rising Asian powers. When Japan’s surpluses became a political problem in the mid 1980s, the two countries engineered a massive appreciation of the yen and Japanese auto companies began to build job-creating factories on American soil.
Conditions in today’s world could not be more different. In the developed countries, inflation is dead as a political issue. Scrimping and saving is the new borrowing. Reducing unemployment of workers is crucial to maintaining the employment of politicians. No surprise, then, that governments everywhere want weak currencies – to boost jobs at exporters and prevent the hollowing out of domestic industry.
History agrees. The last time deflation spread around the world, in the 1930s, the countries that came off the gold standard the soonest – equivalent to devaluing your currency, in today’s terms – recovered the quickest. Those that stuck the longest to the high ground of economic orthodoxy, France and the United States, plunged into depression.
That’s why even the sober Swiss are trying to depreciate their currency. True to form, the UK and the US prefer methods that are less blatant. Bank of England Governor Mervyn King crafted a quantitative easing program that created new money equivalent to 15% of UK GDP. The subsequent decline in the pound he termed “helpful.” President Obama’s target of doubling US exports in a feeble global economy could hardly be accomplished with a strong dollar. With Federal Reserve Chairman Bernanke’s finger hovering over the money-printing button, that doesn’t seem a likely prospect.
The problem is that currency depreciation is a zero-sum game; competitiveness can only be gained at the expense of another country. China says that a big revaluation of the yuan would do serious damage to its economy, which is probably true. China’s critics say the undervalued yuan destabilizes the rest of the world. That’s true too.
Currency spates are just one aspect of the fracturing of the economic configuration that drove global growth for three decades. Today’s China will not act like the Japan of the 1980s. Today’s US will not act like the US of the 1980s either. Without a solid world economic recovery, it will be impossible to contain the building economic frictions.
Economic fracture brings political fracture, both domestic and international. The expulsion of Roma immigrants in France, the controversy about undocumented workers in the US, the unpopularity of incumbents everywhere, the rise of new populist forces in the US and Sweden – this could be a foretaste of what is to come. As in the 1930s, when the struggle for competitive advantage intensifies the rulebook goes out the window.
All the more reason then to prioritize growth and pull every lever – fiscal, monetary, and regulatory – that might encourage it. The alternative is too dismal to contemplate.