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G-20 Will Do Little to End Currency Wars

By    |   Monday, 08 November 2010 01:35 PM

It shouldn’t come as a surprise that currencies are once again coming into focus ahead of the waste of time that is the G-20 pantomime in Seoul, South Korea.

Robert Zoellick, president of the World Bank, wrote in the Financial Times that the world could adopt some kind of gold standard, with gold used as a reference for inflation, deflation and future currency values.

Of course, any suggestion of a gold standard as we have known it in the past is absurd.

World trade, at least I hope, will continue to grow faster than the growth in the supply of gold. Consequently, the demand for international currency would outstrip gold-standard supply. That said, in the meantime, the euro remains a topic for discussion as the EU is now about to dispatch a commissioner to Dublin to look at the forthcoming Irish budget.

On Saturday, the 17th APEC Finance Ministers’ meeting gave its joint ministerial statement in Kyoto, Japan which said: “We will move toward more market-determined exchange-rate systems that reflect underlying economic fundamentals and will refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging economies,” which was a late change to earlier drafts concerning the high level of hot money flows.

The statement says also that deficit economies need to “boost domestic saving, including through medium-term fiscal consolidation, while ensuring that consolidation is carefully sequenced with attention to local economic conditions, so as not to derail nascent recoveries … economies with current-account surpluses need to reduce their reliance on external demand and undertake structural reforms that catalyze stronger domestic demand-led growth, such as enhancing infrastructure finance and strengthening social safety nets.”

Also at the APEC Finance Ministers’ meeting, Chinese Vice Finance Minister Wang Jun made some interesting remarks. “The quantitative-easing monetary policies adopted by the U. S. will boost the U.S. economy, and boosting the U.S. economy will play an important role in global economic recovery,” he said. “At the same time, the quantitative-easing policy has already prompted the concern of emerging nations, and we will continue paying attention to the implementation of this policy.”

With regard to current-account targets, he noted: “We didn’t discuss specific capping targets. The new consensus is to develop a comparative reference plan … Newly emerging-market economies, including China, will unwaveringly carry out the reforms associated with the macroeconomic goals they have committed to, including reform of exchange-rate formation mechanisms.”

From his side, Japanese Finance Minister Yoshihiko Noda said: “We of course discussed external imbalances and currencies, and the APEC finance ministers share the G-20 nations’ basic stance on those issues … The common foundation is being built for countries to address external imbalances, whether they be current-account surplus or deficit, as well as stability of the global currency system … We did not discuss numerical targets for reducing current-account imbalances. We share the basic recognition about what needs to be done to correct external imbalances and the need for multilateral cooperation.”

Also worth mentioning is that an unnamed Japanese Finance Ministry official said: “Various nations said the Fed's easing is creating various problems. But there were no requests like ‘Please stop monetary easing.’”

In this context, it’s also good to take note of what Federal Reserve Chairman Ben Bernanke said: “There is not really, in my mind, as much discontinuity as people think in the path the Fed is currently following … This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it’s just an unanticipated, unpredictable policy — quite the contrary. This is just monetary policy.”

That said, German Finance Minister Wolfgang Schäuble openly disagrees and says in an interview with the German newspaper Der Spiegel that the decisions made by the Fed “increase the insecurity in the world economy … They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the U.S. in finance policymaking … It is not consistent when the Americans accuse the Chinese of exchange-rate manipulation and then steer the dollar exchange rate artificially lower with the help of their central bank’s printing press.”

From his side, Treasury Secretary Tim Geithner said: “We will never use our currency as a tool to gain competitive advantage.” He added that U.S. policymakers understand the “special responsibility” the U.S. has for the world economy. “I’m happy to reaffirm again that a strong dollar is in our interest as a country,” he said.

So despite a somewhat slight thawing of tension between the U.S. and China, the key issues that have driven the extraordinary cycle of boom and bust during the past eight year remain unresolved. On the one hand, although Geithner might have gone out of his way to reiterate his belief in the value of a “strong dollar,” Bernanke’s comments on Jekyll Island made it clear that he was unrepentant about the Fed’s fresh easing measures (QE2).

On the other side, as Chinese Vice Foreign Minister Cui Tiankai made it also clear in a subtle way that China has no intention of revaluing the Chinese currency because “that would indeed be asking us to manipulate our currency's exchange rate, and that is something that we will of course not do.”

With little sign that all these issues will be resolved at the G-20 summit in Seoul, the most likely outcome is that this week we will see, for the time being at least, a continuation of the forces that now have dominated the markets since late August.

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It shouldn t come as a surprise that currencies are once again coming into focus ahead of the waste of time that is the G-20 pantomime in Seoul, South Korea. Robert Zoellick, president of the World Bank, wrote in the Financial Times that the world could adopt some kind of...
Monday, 08 November 2010 01:35 PM
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