Competitive Devaluation, Stage One: Friends Bickering
This is what the early stage of a currency war looks like:
TOKYO -- Prime Minister Naoto Kan joined the growing chorus of world leaders complaining about the side effects of American economic policy, tying the Japanese yen's strength to Washington's aggressive stimulus efforts -- and implying that the U.S. should be accepting of Japan's own controversial moves to halt the yen's rise.
"First and foremost, one of the biggest reasons for the yen's rise is the dollar's weakness, a reflection of America's economic policy. We need for there to be a clear understanding of that background," he said in an interview with The Wall Street Journal Saturday. He added: "President Obama has said the U.S. wanted to shift its economy from one driven by consumption to one that relies more on expansion of exports. We do recognize that basic policy. But there are reverberations of that policy on Japan."
While many nations have seen their currencies appreciate recently against the U.S. dollar, Mr. Kan stressed that Japan's weak economic growth makes its ability to cope very different from that experienced by emerging markets where growth is strong and exports are rising steadily. "In that sense, we would really like the U.S. to understand the situation we are facing," he said.
Mr. Kan also made clear that Japan reserves the right to intervene in currency markets again. Rapid one-way movements in exchange rates are problematic, he said, saying that was why Japan felt compelled to intervene in September. "If we face another rapid surge in the yen, such a step may become necessary," he said.
The U.S. dollar has fallen almost 13% against the yen so far this year. A stronger currency pinches Japan's exporters because it makes their products more expensive abroad and pinches profit margins.
Finance Minister Says Policy "Doesn't Add Up,' Sees U.S. Model in "Deep Crisis'
BERLIN -- German officials, concerned that Washington could be pushing the global economy into a downward spiral, have launched an unusually open critique of U.S. economic policy and vowed to make their frustration known at this week's Group of 20 summit.
Leading the attack is Finance Minister Wolfgang Schäuble, who said the U.S. Federal Reserve's decision last week to pump an additional $600 billion into government securities won't help the U.S. economy or its global partners.
The Fed's decisions are "undermining the credibility of U.S. financial policy," Mr. Schäuble said in an interview with Der Spiegel magazine published over the weekend, referring to the Fed's move, known as "quantitative easing" and designed to spur demand and keep interest rates low. "It doesn't add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank's printing presses, artificially lower the value of the dollar."
At an economics conference in Berlin Friday, Mr. Schäuble said the Fed's action shows U.S. policy makers are "at a loss about what to do."
Mr. Schäuble hit back at critics in the Der Spiegel interview. "Germany's exporting success is based on the increased competitiveness of our companies, not on some sort of currency sleight-of-hand. The American growth model, by comparison, is stuck in a deep crisis," he said. "The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base. There are many reasons for America's problems -- German export surpluses aren't one of them."
NEW DELHI -- U.S. President Barack Obama, returning fire in a heated exchange with Germany, added his voice to U.S. efforts to reduce massive German and Chinese trade surpluses and increase pressure on China to let the value of its currency rise.
Tensions have flared between German and U.S. economic officials ahead of the summit of the Group of 20 industrial and developing nations, which begins Wednesday night in Seoul. U.S. Treasury Secretary Timothy Geithner has been pressing member nations to adopt targets to lower trade surpluses and trade deficits. In return, German officials have publicly lectured Washington about the wisdom of its economic policies.
In a joint news conference with Indian Prime Minister Manmohan Singh here, the U.S. president came close to defending the U.S. Federal Reserve's decision to pump $600 billion into the economy by buying U.S. Treasury bonds in a bid to keep interest rates low and spur consumer demand. The Federal Reserve is independent of the administration, and by tradition the White House has strained to avoid any appearance of collusion on Fed and administration policies.
Mr. Obama said the administration doesn't comment on particular actions of the U.S. central bank, then said, "I will say that the Fed's mandate, my mandate, is to grow our economy. And that's not just good for the United States, that's good for the world as a whole."
The G-20 summit is shaping up as a showdown between the exporting powers and nations like the U.S. that are struggling to emerge from recession and high unemployment by tapping export markets. Mr. Geithner, facing continuing resistance from China on the currency issue, has shifted his focus to trade surpluses, which can be exacerbated by artificially low currency values as well as other policies. That was meant to lift some of the pressure from China and spread it to other nations, especially Germany.
At this point, everyone is still basically friends. They're annoyed with each other and worried about the next election, but fully expect to get past this spat and resume more-or-less amicable cooperation/competition in the not too distant future.
But no one has any idea how to get from here to there. The US consumption/debt driven model is an obvious failure, and the export-driven models of Germany, Japan and China are unsustainable because they depend on their trading partners going deeply into debt, which the surplus countries then have to subsidize. In business this is known as vendor financing (lending a customer the money to buy your stuff), and it works only as long as the customer can continue to pay its bills. Frequently, the practice just ends up stealing from future sales and saddling the lender with big write-offs.
So things will get much uglier when the surplus countries 1) see their exports plunge because their strong currencies have priced them out of global markets or 2) try to use their dollars to buy US assets and are blocked by the US on national security or political grounds.
Then the real competitive devaluations begin. Pure, panic-driven self interest will dominate international relations. Former friends will use their exchange rates as weapons, producing chaotic, non-linear markets and -- if history is a guide -- some real (as opposed to currency) wars.
The end result, if we're lucky, will be the realization that politicians can't be trusted with printing presses.