Subtitle: China's currency regime is not the only impediment to global adjustment.
Consider these two graphs (follow the links):
And the export revenues of Gulf oil exporters, in dollars.
Canada also exports a lot of energy. Lots of autos too. The "unfair" competitive advantage created by national heath care has made Ontario the new Michigan. But Canada's currency still tends to move in line with commodity prices – see this graph. If I had a bit more time and technical skill, I would invert so it could be more easily compared with the oil price graph. But you will have to use your imagination. Trust me: it now takes more US dollars to buy both a barrel of oil and a Canadian dollar.
That is how the world should be. The currencies of commodity countries should rise as commodity prices rise. Now look at the Saudi currency v. the dollar. It is basically flat (check the scale). Saudi Arabia pegs to the dollar at a rate of 3.75 riyal to the dollar.
Stephen Jen is certainly right to note that rising oil prices have shifted the world's current account surplus to the Middle East and Russia. Saudi Arabia and Russia are likely to each run current account surpluses of around $100 billion this year – not that much less than China.
And relative to GDP, there is no doubt that the world's biggest current account surpluses are now found in the world's oil exporters. Japan's surplus is actually shrinking. The same is true of most of non-China Asia. India and Thailand are looking at current account deficits. According to the IMF, the surplus of Russia and the Middle East will surpass the combined surpluses of the Asian NICs (Korea, Taiwan, Hong Kong, Singapore) and emerging Asia (China plus).
And Saudi Arabia is not alone. Many other oil exporters also either peg to the dollar or intervene heavily to resist currency appreciation. Those pegs, like China's peg, are impediment to global adjustment. In real terms, the currencies of many oil exporters has followed the dollar down since 2002 – the dollar has rallied this year, but its rally still pales relative to its overall slump v. the euro. That depreciation – at least of their broad nominal exchange rate — has come even as oil revenues are way, way up.
I have long argued that it does not make sense for China, a country with a large current account surplus, to peg its currency to currency to the dollar, the currency of a country with a large current account deficit. That same logic holds for Saudi Arabia.
Oil exporters would be better served if they pegged their currencies to another commodity currency – say the Canadian dollar. Then, their currencies would rise along with oil prices, and fall along with oil prices. And they would not import the monetary policy of an oil importer, which may not be right for an oil exporter.
That would help these countries' economies adjust to fluctuations in commodity prices. See Jeff Frankel's proposal to peg to the export price (The Canadian dollar can be thought of as a proxy) and his specific recommendation for Iraq. Saudi Arabia might want to take notice.
And should oil prices remain high and the dollar resume its slide (contrary to Mr. Jen's forecasts) to help reduce the US trade deficit, it certainly does not make sense for the currencies of oil exporters to get weaker. These countries generally speaking need to spend more, not less – and a sliding currency reduces their external purchasing power.
I agree with the Treasury: the IMF has not paid enough attention to exchange rate pegs that impede effective global adjustment. That applies to the currency regimes of the oil exporters every bit as much as China. There are not domestic pressure groups in the US demanding an appreciation of the riyal, but, unless the profits of Exxon Mobil and the Saudi royal family fall, the riyal needs to rise as much as the renminbi.
Two caveats. Oil economies are different, and their management does pose some unique challenges. Since the government of oil exporters often controls the country's oil export receipts rather directly, the government budget plays a bigger role in the creation of a national savings surplus than in a country like China, where export receipts are private and central bank intervention is absolutely crucial. Two, building up an external buffer of hard currency assets in good times is one way to help protect an economy from the fluctuations in oil markets. But a good idea can still be taken too far. If, as the market now expects, oil prices will remain high for some time, simple arithmetic suggests that the oil exporters will have to play a role in global adjustment. They are the ones with the biggest surpluses right now.