G-7 punts on the yen, as expected
The G-7 punted on the yen, more or less. They didn't highlight yen weakness in their closely watched paragraph on exchange rates. Though, as Morgan Stanley points out, the language on Japan ("Japan’s recovery is on track and is expected to continue. We are confident that the implications of these developments will be recognized by market participants") presumably was meant to send something of a signal.
I wonder if the markets will pick up on the "recovery is on track" language, or will take the absence of stronger language on the yen as an "all clear" sign to make even bigger bets on yen weakness.
The G-7 did talk explicitly about the RMB. That isn't a surprise, but Chinese presumably still don't like being singled out. China isn't a part of the G-7, and its currency was called out. Japan is a part of the G-7, and its currency wasn't mentioned. Yet by some measures the yen is now as undervalued as the RMB. That sort of thing rankles the Chinese — even though it would be a far bigger deal for the G-7 to talk about the yen than the yuan precisely because Japan is a part of the G-7.
Intellectually, though, the language on the renminbi makes sense. The G-7 called for an appreciation of the RMB in real effective terms.
In emerging economies with large and growing current account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur
That is right. China's current account surplus looks set to increase even further from its already enormous (8-9% of GDP) 2006 levels on the back of strong export growth and stable or falling commodity prices. The RMB appreciated against the dollar (modestly) last year, but since the dollar slid v the euro by far more than the RMB rose v. the dollar, the RMB didn't move much in real effective terms. The RMB/ euro matters, not just the RMB/ dollar. Remember, China now trades as much with Europe as with the US.
The Chinese are not the only Asian economy that won't like the communique. Korea will be disappointed that the G-7 didn't agree to do something about yen weakness.
The yen/ won probably has a bigger impact on Korea's economy than the won/ dollar — and right now, the Koreans are very worried about the won's strength against the yen. Probably even more worried than the Germans.
The G-7 doesn't agree on hedge funds, not really. The Germans want to do something, the US and the UK aren't convinced there is a need to do much, and certainly not as much as the Germans would like. So they agreed to a study. Fair enough. Call it papering over a disagreement. But if the Financial Stability Forum's report is done well, it should provide a lot of information about the evolution of financial markets since 2000. Among other things, I'll be interested to see if the FSF believes that hedge funds are still less leveraged than they were in 1998, taking into account the embedded leverage of many derivative contracts.
The G-7 is being disingenuous here. It states that “exchange rates should reflect fundamentals” then omits mentioning the yen while singling out the yuan. For me, neither the USD/JPY nor the USD/RMB reflects fundamentals. (The same holds true for any number of other Asian currencies.) The G-7 then suggests that the IMF should improve its exchange-rate surveillance to fix things. Yet we know that the IMF is toothless in enforcing discipline on non-debtor countries. Unless it can have “teeth” regarding FX rates, it’s useless here.
Not that it’s going to be easy, but the solution will involve moving on these matters simultaneously. Japan won’t take action unless China does–they are the leading Asian exporters and the rest will follow in their wake. Someone needs to coordinate simultaneous regional currency appreciation against the dollar to punish carry-trade speculators and limit CB beggar-thy-neighbor activities. Until that happens, “exchange rates that reflect fundamentals” will mean little in practice.
I agree with Emmanuel, though I do think G-7’s language can be excused. The G-7 countries have much more leverage over Japan than over China. If the weakness of yen becomes a bigger issue, it will be corrected. The same can’t always be said of the yuan.
I wonder if the West has understood recent events well. China called the bluff of the US re tarrifs and the US has shut up. As a result China knows it can do precisely what it wants re the yuan and the rest of the world can only complain or, like America, screech and scream. Little good it will do them.
Someone?
Who?
US — not part of the region, not trusted, not seen as putting its own house in order (tho it has — more by good luck than good policy — brought the fiscal deficit down more than I would expected).
Japan — not interested.
China — not interested, at least not interested if it means moving faster than the political consensus in China allows, and so far, the consensus in China has lagged developments on the ground, so to speak.
Others? Too small v. Japan/ china. Korea and Thailand tried to lead but, well, now feel isolated and overly appreciated …
BS writes:
“Japan — not interested.
China — not interested”
i’d only add
fed/wall street—not interested
nice to come back after a long time away
and find all is ship shape at
casa brad
Someone…ASEAN + 3, that’s who!
My scenario goes like this: China and Japan are competing for influence in the region now that the US is more attentive to the Middle East (or is at least temporarily distracted). What us ASEAN folks need to do is precondition further regional economic integration with China or Japan on, you guessed it, giving up on their game of CB beggar-thy-neighbor. ASEAN can play off China and Japan for influence depending on who is more willing to make concessions on ending the wretched BW2 from which collective benefits are not forthcoming.
Then Asian savings can be spent on more productive things than accumulating reserves. Then the yield curve in the US will no longer invert. Then American consumers will be forced to save. Then global economic imbalances will cure themselves. I honestly believe that us ASEAN small-fry–not the biggies like the US, Japan, or China–can get the ball rolling. Far-fetched? Sometimes it’s not the biggies who spark cataclysmic events like that nutter who assassinated Franz Ferdinand demonstrated. You know, it just might work.
——
Gcs: Fed/Wall Street are the villains in this story for me, those carry-trade lubbers. Bloomberg has a monopoly on sensible op-eds (in contrast to a certain Dow Jones publication). Here’s Bill Pesek:
The stable dollar — thanks largely to steady Asian demand for it — leaves rates low enough to encourage U.S. consumers to spend without saving. It also keeps the price of crude-oil imports at a level that discourages Americans from conserving on energy use.
And then the U.S. points the finger at China to boost its currency — which would benefit the U.S. — and treads carefully on Europe’s campaign for a stronger yen, which could hurt U.S. interests. The dollar is now a political tool as much as it is a medium of exchange.
Just as valuable commodities such as oil distort economies and confuse priorities, the dollar is giving the U.S. few incentives to correct its imbalances and plan for the future.
Nothing more for me to add, really.
“Someone needs to coordinate simultaneous regional currency appreciation against the dollar to punish carry-trade speculators”
Who has a line of credit sufficient to borrow all the foreign currency that is being used in the carry trade? If anyone is punished, it would seem likely to include the original lenders who might be stiffed by bankrupt hedge funds. Those lenders deserve to get whacked (as do the mortgage lenders in the US).
The US is by far the greatest beneficiary of the current financial regime - using “beneficiary” strictly short term, of course. A pegged yuan provides for cheap imports and low inflation, while a cheap yen provides low-interest financing for its enormous debt (public and private).
The FX and interest rate imbalances also prime a liquidity arbitrage pump that provides fees and profits to the one industry where the US truly reigns supreme: investment banking and trading. Mr. Paulson is not going to agree to demolish his own house.
The same holds for the UK, also an asset/debt based economy that benefits tremendously from its one remaining “industry”: London’s financial center. Isn’t it ironic (shameful, even) that the euro’s trading center is located in the only major EU country that refuses to adopt it?
Take the US and the UK out of the G-7 and the remainder is completely toothless. Global monetary policy - including that for the EU and Japan - is set in NY and London and not Frankfurt, Paris or Tokyo. This has profound implications for global capital markets and until the rest of the world desires and acts to acquire control of its own finances, NY and London will continue to exercise their power for their own benefit - within the context of “free markets”, of course.
Can you blame them?
it’s always interesting how demons are singled out and the crowd is encouraged to clamour for their punishment with little knowledge of the cost of the fallout to themselves - or the extent to which the demonization process can be used to cover the complicentcy of others, many of whom enjoy immunity from prosecution. In modern warfare, most of the casualties are civilian.
re: “The dollar is now a political tool as much as it is a medium of exchange.”
What was it before that?
The ’someone’ might be the shareholders, although in the world of funds and derivatives, it seems there are few ‘investors’ with a voting or active interest. For example, why would an institution like Harvard choose ETFs as the vehicle to invest a portion of its considerable financial and intellectual wealth in ‘developing’ countries like China, rather than establishing, or even worse, perhaps after selling more direct, and presumably influential interests in firms based in those nations:
“Harvard’s investments in two Chinese oil firms accused of financing the genocide in Sudan now total an estimated $16 million, The Crimson’s continuing investigation of the University’s stock holdings has found. Although Harvard has said that it would sell its shares in the two firms, PetroChina and Sinopec, it appears that Harvard’s holdings in both firms have actually increased since the divestitures were announced…” http://www.thecrimson.com/article.aspx?ref=516580
Speaking of the pot that calls the kettle black, Paulson and Bernanke repeatedly accuse the Chinese of irresponsible behavior. For the record, the US runs the most reckless monetary policy on the planet with absurd credit lending practices that have inflated the biggest Real Estate Asset bubble in world history. Instead of investments in technology and Industrial development, trillions of dollars in capital have misallocated in first Dot-con stocks and more recently, McMansion Housing. What measures have Federal Reserve regulators taken to contain rampant appraisal fraud, sub-prime lending, and no documentation lending abuses. Federal Reserve stimulation of non-productive economic activity with lax lending policies has greatly contributed to global economic imbalances centered on the US trade deficit.
Hellasious — isn’t one implication of your comment that global monetary policy is really set in Beijing (by the state council, which decides the allowed appreciation of the rmb and thus demands massive fx intervention) and Tokyo (by the BoJ, tho responding to pressure from the MoF/ others, which keeps interest rates low and induces a capital outflow) and perhaps Riyahd and Moscow (Who decide whether to save or spend the oil windfall) rather than in NYC or London, both of which just respond to the inflows dictated by policy choices elsewhere?
Dear Brad,
“Is global monetary policy in fact set in Beijing or Tokyo?”
No, not really. Since the dollar is (still) the global reserve currency, global monetary policy is by definition set in the US. Right now China and Japan are simply providing cheap “vendor financing” to keep their export-oriented economies running, even though the customer is tapped out. This is not monetary policy, it is mercantilist policy.
Of course, at some point Beijing and Tokyo (plus Riyadh, Moscow, et al) may decide that enough is enough, no more buying on credit. But for that to happen their domestic economies must provide enough final demand to keep their people at work. This is very far from being the case right now. The sharp increase in recent years of US bond purchases by foreign central banks (instead of non-govt. investors) tells us that they are really desperate to keep this process going (how much longer?) to forestall recession and increased unemployment.
Since you have mentioned Turkey before, perhaps you are familiar with the financial history of the final few decades of Ottoman Empire -”The Sick Man of Europe”. Tremendous profits were made by sharp financiers (mostly Europeans) during ~1860-1900 by financing a corrupt, over-indebted Empire with a deteriorating tax base that imported huge volumes of European manufactured goods - on credit. The analogy is not perfect, of course, but it makes for fascinating comparative financial history reading.
Regards
PS Putin’s remarks about the US during the Munich conference yesterday may in fact be the first real warning shot across the US’s bow. Gate’s half-joking reply today may be construed as appeasement. In other times Acheson or Dulles would have told him to stuff it, in plain English and no jokes. Blanche DuBois cannot afford to have her credit card revoked, it seems. Interesting times, very interesting.
Global monetary policy was a bad choice of words on my part, how about global financial conditions?
My guess is that if you kept us monetary and fiscal policy constant and changed monetary/ exchange rate and fiscal policy outside the US in a way that dramatically reduced official inflows, financial conditions in the US would change dramatically ….
Agree Putin’s remarks at the conference were interesting. Sort of goes with a policy package that has included reducing Russia’s financial exposure to the $. The interesting thing is that other key players aren’t following suit — not the saudis, who seem far more worried about Iranian primacy than US primacy, and not the chinese, who are playing their own long game.
Since US is toothless, and anyway might bite the wrong people - the situation will continue for a while. As long as it continues, the “beneficiaries” of low-valued currencies are importing inflation, not only from the US but from Europe. That may be exactly what Japan wants and needs. How can Japan raise rates in an economy that appears to have falling consumer prices to this day? How can China raise the Yuan when the puppet-masters in Beijing risk a revolution from peasants who are hungry for change?
IMHO, it appears that the APPARENT beneficiaries of the present financial conditions are Japan and China and the US. But I think in terms of overall economic health, it’s really Singapore, Korea, Thailand, Estonia, Poland, etc.
Since 1989 the rest of the world has been waiting for another strong nation to replace the USSR. China has, with many missteps, begun to advance its flag as a counterweight to the US. Now Russia, streamlined in Armani and full of cash, steps forward and offers itself. So much for the dreams of a Pax Americana.
What I want to know is: what role will Russia and China play in unraveling these global trade imbalances? Or will we just have a collapse, triggered by some bank run or trigger-happy dreamer?
Dear Brad,
What you are saying, in simple words, is this: if the US keeps on spending money it does not have and the rest of the world refuses to lend it, then the US would be up the creek.
Well…sure! That’s called, variously: “the pigeons coming home to roost”, “the day of reckoning”, “TSHTF”, etc etc. And unless people in DC and Wall Street sober up from their debt-drunk binge it will sadly come to pass soon.
It is apparent to anyone who can perform simple arithmetic that the United States is grossly abusing the dollar’s position as global reserve currency. It cannot for long be that the world’s main store of value and instrument of international transaction is the currency of the world’s biggest debtor. Since all fiat currency is essentially backed by semi-religious faith, at some point it will simply be withdrawn from a nation so profligate in debt and so determined to emasculate its own productive capacity, only to replace it with “finance”.
Finance is not fundamental economic activity but the means through which it is facilitated. A bank cannot replace a steel mill anymore than a lottery ticket can replace earned income. Finance is a food processor: it slices, dices and purees - but it does not produce food.
As to the rest…
The Russians have always loved to play Empire, ever since Peter the Great. Putin is determined to revive Mother Russia, no doubt. The Saudis…when/if they decide to unpeg their rial from the dollar - or even leak a rumor about it - it will be the clearest sign of the end of American global supremacy.
But such talk of America’s demise is early and may still prove wrong. The US has the ability to re-invent itself technologically, industrially and socially - if it emphasizes a move away from petrodollar militarism and towards a renewable energy regime coupled with a sustainable economic policy.
Regards
Am I right in that China’s GDP is 2.7 tr USD, purchasing parity aside, and that imports and exports are 1.7 tr of that figure. Debt for Development. You would think some countries would be appreciative for the opportunity to develop via some vendor financing arrangement.
As to US asset bubbles, has anyone ever taken a look at the blocks of uninhabited buildings that have been built in China of late, countrywide. They just keep on building, how, why? Need I ask.
Frankly, other than t-shirts and underwear there is nothing that I buy made there. Little that I need to buy other than food and electricity as I own my home, cars, and haven’t needed house wares in years. Could probably outfit four or five families with the extra junk stored in my 20 room house.
Could someone please explain how, China could pick up demand within its own country. Also, how China will feed itself in twenty years. Further with so much inter-trade between Asian countries for final export to consuming nations what would be the roll-out of taking the US out of the picture as Chiangesque pundits would have. Finally China is an important holder of USD’s, but really what would happen if they dumped them. What percentage of global assets are denominated in dollars and not liquid. The fact as I see it is that the international system itself is a farce. I would think that those so interested in the development of their countries would rather buy time and make the best of their situation than to expose the system, with no real replacement to the dollar, to eventual complete and utter failure, and as such, the fates of their people.
As to USD reserve accumulations, I foresee a day when the top 50 richest Americans, perhaps 200, are of Arab descent after the oil wealth expropriated from the land is finally and fully moved safely, along with these princes families families, to the States with islamicists trying to pull what little they can from the ground.
“As to USD reserve accumulations, I foresee a day when the top 50 richest Americans, perhaps 200, are of Arab descent after the oil wealth expropriated from the land is finally and fully moved safely, along with these princes families families, to the States with islamicists trying to pull what little they can from the ground.”
Extreme by interesting thoughts. C/A doesn’t track the wealth moved with immigration or does it? Murdoch is a good example to ponder. Unlike other nations, USG taxes on its residents’ global income, where ever sourced, and I suppose the inheritance tax is on the global asset of the estate as well. Of course much of the largest estates will pass into US based charity funds to escape the taxation. Such a scenario for the final outcome/equilibrium of the globalization is not necessarily unwelcome, here in the US and globally.
In the end, the real strength of the US is its political system.
The Gates foundation receives billions each year from from Warren Buffet alone — and is required to spend (not accumulate) them — on top of what the couple has contributed. That is more money than the annual budget of most nations. One example of globalized wealth entrusted to do global good deeds. It is not exactly democracy but it has the potential going beyond narrowly defined national interests.
Competing for influence in East Asia is problematic, at best.
Indonesia and Burma has quasi-warm historic feelings toward Japan; the rest of the region remembers the pain.
Korea, Vietnam and Taiwan fought wars with China, and all of the region is a bit wary of a large and unpredictable neighbor.
The best strategy is to play Japan and China off each other, keeping the West in the background as a last resort.
Brad–The difference between the yen and the renminbi is not that Japan is a member of G7 while China is not, but that Japan has not intervened in the currency market almost three years while China intervenes everyday in order to maitain the grossly undervalued currency.
Of course, if Europeans really think the yen is undervalued and hurting their industry, they can intervene the euro-yen market, which the ECB never accepts. So, from the outset, there was no possibility that G7 might do anything regarding the weak yen.
Then, why G7 mentioned the renminbi? Partly because of inertia, partly as a warning to China that protectionism might eventually take care of the global imbalances. This is unfair to China, because only about a quarter of the imbalances is due to China, while fully half of the imbalances is due to oil producers, and above all, the imbalances are largely created by the US overspending.
My advice to China is simply that the world is unfair, and China would suffer more and hugely by sticking to the undervalued currency.