Several otherwise sane analysts and journalists are talking about the global currency war that has supposedly begun, with everyone trying to devalue their currencies (“beggar thy neighbour”) at the same time. G7 officials are reported to be conferring ahead of G20 meetings in Moscow this week about whether to issue a statement on currencies (for the first official statement since 2011). These statements tend to support stable markets without excess volatility (“excess” not defined), the economics equivalent of Mom and apple pie.
Some say the Fed deliberately cut rates to zero specifically to devalue the dollar, for example. We say that would be a big surprise to Mr. Bernanke, who sees stock market and commodity gains and changes in the dollar as unavoidable side effects of polices aimed at the economy. The Wall Street Journal writes that “The dirty secret is that using monetary policy to weaken a currency, whether voluntarily or not, is a shortcut to avoid unpopular decisions on fiscal and budgetary issues.”
What bilge. It’s true that Fed policy would probably be less accommodative sooner if the fiscal side were functional, but aside from China and probably Japan (although it denies it), central banks today are targeting growth, not currencies. They are being accused of engaging in a war when their intent is entirely different, and thoroughly justified in their own interpretation of their proper role. Devaluation is a side-effect.
To be fair, some central banks do mention the level of the currency (Canada, Australia, UK) and we all listen with our ears flapping, but we defy anyone to name a single central bank action designed specifically to affect a currency and not some other, bigger target. The UK, in particular, would take issue with the statement that devaluation is an accepted alternative to hard decisions on fiscal measures. The UK believes it has taken the hard fiscal decision, unlike the US. The ECB feels the same way, and note that Europe is left out of this silly exposition of a “currency war.” How can it be a war if one of the three top players is not participating? And if the US had a policy of dollar devaluation, it should be complaining about Japan. What complaints we hear are whispers, not shouts, especially since Japan has gotten a weaker yen on sound bites alone.
Finally, consider the original source – Brazil’s FinMin Mantega. Two years ago he told G20, in essence, that the US should stop QE as a “selfish” policy because it was driving yield-hungry investors to Brazil and raising the currency too far. The Fed doesn’t work for Brazil. It works for the US citizens, and they need jobs as well as a stable financial system. Imagine what would have happened if the US did as Mantega wanted? No QE 1 through 3 and no Twist – the Great Recession would still be in place. Brazilian exports to the US would fall to zero (bilateral trade was over $100 billion in 2011). Worse, foreign direct investment from the US to Brazil would fall from $71 billion in 2011 to… what? Mantega should be careful what he wishes for.
This brings us to the French. French President Hollande complained about the too-strong euro harming the economy and called for an exchange rate policy. According to the Financial Times, he said “The euro should not fluctuate according to the mood of the markets… A monetary zone must have an exchange rate policy. If not it will be subjected to an exchange rate that does not reflect the real state of the economy.”
Oh, like Bretton Woods? That worked so well, didn’t it? We recall periodic French franc devaluations in which the French leaders boasted about having devalued more or less than the economic metrics would have called for… We also recall French demand for physical gold having led directly to the dollar going off the gold standard in 1971 and French dissatisfaction with the level of the dollar being a key driver leading to the Plaza and Louvre Accords, which were both horrible failures. Those who do not study history are condemned to repeat it.
We disapprove of analysts saying Draghi was engaging in verbal intervention when he said a strong euro may in the future change the analysis of the euro zone’s economic outlook. He may or may not have intended the statement to move the market, but never mind – it’s a true statement of economic cause-and-effect. It’s also not as shocking as Trichet saying the euro’s level was “brutal,” a word that carries more emotion.
Japan is a somewhat different case. Japanese officials deny that their remarks about increasing inflation to 2% and taking additional actions to boost the economy are related to a devaluation of the currency. Economics Minister Amari said the government focus in on reviving its economy and it is not actively pursuing a cheaper yen. He said Japan is “absolutely not deviating from global standards. I don’t comment on a foreign exchange rate because it should be determined by the market. What we do is to implement policies.”
Japan is the obvious target if G7 decides to refine its statement. Japanese officials are mindful of the official G7 stance and denies it is targeting the yen, which technically cannot be proven. The big yen moves were inspired by key words and the expectation of new policies, with the only actual change coming in the form of another QE stimulus package. Strong-arming the BoJ into a joint statement that the inflation target will be 2% instead of 1% hardly counts as a policy action aimed only at the yen.
We will all be holding our breath to see if G7 comes up with something that will prevent G20 from making an inflammatory communiqué. The G20 meeting, please note, is in Moscow, where they know a thing or two about loose lips sinking ships. We think there will be a statement and it will caution officials to start keeping their lips zipped. This whole currency war thing is a distraction – entertaining, but not true and useful.