Sunday, November 21, 2010

Economists Say Currency War = "Competitive Devaluation," Predict Dollar Will Sink To Six Bits On The Current Value

(click to enlarge graph)

All signs indicate a severe case of economic gridlock in Congress - dead ahead

“Them gasoline boys downtown sure talk pretty” - Bruce Springsteen

Frankfurt - Most economists and government types don't like the term “currency war.”

They very much prefer to use the term “competitive devaluation” when it comes to the current conflict between the U.S., China, Japan and other major creditors holding the U.S. Treasury's paper in Asia and Europe.

The truth is, the conflict remains, no matter what you call it, and it has far reaching implications for working men and women.

In an appearance before a panel discussion led by Jean-Claude Trichet, president of the French National Bank, Federal Reserve Chairman Ben Bernanke said last week, “Emerging countries,” places such as Brazil, Turkey or South Africa, “are carrying a double burden” in a “two-speed” global recovery that has left the most advanced countries lagging far behind China and India.

It's the same point President Obama tried and failed to make at the G-20 Summit meeting in Seoul.

The pair call it “persistent imbalances” in the trade that “represent a growing financial and economic risk.”

The source of conflict, the flexible currency exchange rates realized by emerging industrial economies, seems not to be up for negotiation.

The U.S. has run into a stone wall and it's both the collision and the sudden stop that hurts.

Here's how it works out.

To paper over the huge gaps caused by deficit spending, the central banks of certain economies such as the U.S. have for many years engaged in the intentional devaluation of its currency – competitive devaluation, or, as China calls it, “currency war.”

Xinhua (sheen-wah), the official government news agency of the People's Republic of China, defines the dynamic thusly, as a “situation where one nation, relying on its strong economic power, buffets its competitors and seizes other nations' wealth through monetary and foreign exchange policies. It is a form of economic warfare with cold premeditation, specific purpose and considerable destructive power.”

Though currency devaluation has adverse consequences on a state – leading to a reduction in citizens' material standard of living as purchasing power is reduced in buying imports and traveling abroad - it does have a silver lining in times of high unemployment, or when a nation wishes to go after a policy of export-led growth such as China and Korea have pursued vigorously over the past three decades. Any knowledgeable observer who purchased a computer, a set of tires or a flat screen television in the past few years knows all about that.

The blowback is expensive.

International debt servicing becomes more costly, especially when denominated in a foreign currency; foreign investors are discouraged by the poor posture exhibited by a weakened currency.

Consumers and working people are coming to experience new ways of coping that are dictated by a devalued dollar, and it chafes, to say the least.

A lower value for the home team currency leads to increased production in terms of gross domestic product, which should raise employment. It works when other options such as public spending are closed off due to huge debt, or when an imbalance of payments exists.

But a cheaper dollar will not be enough, Mr. Bernanke conceded at the Frankfurt conference.

“Deficit countries have to do their part,” he told central bank executives from around the globe.

When Bank of Mexico Governor Agustin Carstens asked what the United States will do to reduce its trade deficit, he replied that a cheaper dollar will not be enough.

“It would be difficult for exchange rates by themselves to restore balance,” he said.

The remark really didn't clear the air.

The riff came after repeated attacks by member nations over the predicted Nov. 3 post-election announcement that the Fed will begin to inject $600 billion into the system buying up Treasury bonds. The program will last until June in hopes of reducing long-term interest rates.

Critics pounced immediately, warning that the Fed's monetary policy could lead to price bubbles such as the housing boom that crashed in 2007, leaving the world's financial markets in an economic tailspin and resulting in widespread unemployment – a 10% factor that has hovered there for the past 18 months.

Though the nation's economic policy makers have succeeded in halving the targeted 2% inflation rate and kept that factor at about 1%, the critics are not satisfied.

Speakers at a libertarian Cato Institute conference held in Washington the same day denounced the Fed's new policy, as have many others over the past two weeks.

Congressional Republicans are expected to follow suit, labeling the Fed's new policies as yet another element of the “Obama agenda.”

No mention of an extension of the Bush tax cuts made it to the floor of discussion.

No comments:

Post a Comment