Thursday, April 13, 2017

Dean Baker — China and Currency Values: Fast Growing Countries Run Trade Deficits


No specific mention of the USD peg. Of course, a country that pegs to another currency is "manipulating its currency" (Trump before Xi visit) or "managing" its currency (Baker), which amounts to the same thing. The country is not allowing the market to set the rate by floating the currency.

To be consistent the US should be pressuring China to drop its peg to the USD.

My own reading is that China wants to hold the peg awhile longer, not to manipulate the relative value but rather to reduce exchange rate volatility. It needs and wants a stable currency.

Beat the Press
China and Currency Values: Fast Growing Countries Run Trade Deficits
Dean Baker | Co-director of the Center for Economic and Policy Research in Washington, D.C

45 comments:

Neil Wilson said...

It makes sense for any export surplus country to peg its currency to stop it going up - Denmark style.

It's the acceptable face of currency manipulation.

Once again the silly notion that international relations are market driven rears its ugly head. In reality it is scrambling for position.

Who is going to be the first import nation to remove income and capital gains from foreign owners in nations running an export surplus and force them to hold cash or get the equivalent of cash?

Once somebody does that, then export led growth will vanish.

Interesting that Baker puts the cart before the horse. It's the exports that drive the currency holdings.

Tom Hickey said...

It makes sense for any export surplus country to peg its currency to stop it going up - Denmark style.

It's the acceptable face of currency manipulation.


Germany very cleverly "pegged" the DM to the euro.

Schofield said...

The so-called "acceptable" face of currency manipulation is morally untenable. Given genuine democracy who on earth wants to be the dufus (doofus)!

Unknown said...

Currency Manipulation is always a BS term. Every Central Bank on earth has complete monopolistic power over their own currency for their own economic benefit.

The funny thing is that if China unpeg their own currency, their currency will create a greater purchasing power. In addition, if that happens, this will compete with U.S. as a imported based economy. Therefore, it will compete with EU and US dollar as a reserve currency status.

Jose Guilherme said...

But what is the main determinant of an exchange rate?

It doesn't seem to be trade flows. The total amount of world trade is about $ 20 trillion a year, while total foreign exchange flows were 60 times greater - $ 5.1 trillion a day of which $ 1.7 trillion were spot transactions. These are the figures from the most recent statistics published by the Bank of International Settlements ( http://www.bis.org/publ/rpfxf16fxt.pdf ).

Things were different back in the days of Bretton Woods. Financial and currency flows were controlled - the turnover in foreign exchange markets followed closely the trade flows between countries. But not anymore.

Unfortunately, the discussions about currency "manipulation" or management are still stuck in Bretton Woods era mentality. They seem to miss the key point that exchange rate movements are now only weakly correlated to the state of trade and current account balances.

John said...

Just saw the news that the insane clown now says that China is "not a currency manipulator". Forgive me, but I'm sure an obese orange figure who looks remarkably like the insane clown currently trying to start world war three said that "on day one" he'd call China "currency manipulators" and he'd do something about it. Elsewhere he called the Chinese "motherfuckers" for their "currency manipulation". Is there anything that Trump will not go back on, or is everything up for sale?

So this is the great deal maker in action on the world stage, making a laughing stock of himself. Whatever he say's he'll do, he does the exact opposite. Apparently, that was his M.O. in New York real estate. That's why he has the worst name in the business, and everybody hates him. There are far richer real estate moguls, but no one particularly hates them. Trump is universally despised by the industry as a lying sack of shit, who made everybody else look sleazy and corrupt just by being in the same industry.

http://www.huffingtonpost.com/entry/57fd58b5e4b0dccfa3908cbc?timestamp=1476222616395

Michael Bloomberg nicely sums up Trump's business acumen while also hinting at his amorality, duplicity and fraud: “No one has ever done business with Donald Trump and walked away with a hundred cents on the dollar. No one will do business with him today, not the banks, not his former partners and not the construction industry.”

John said...

Jose, I can't say I understood it either. I've asked this very same question before but have never really had a satisfactory answer.

We know that trillions of dollars are moved around every day by speculators. But apparently big companies like VW or Toyota repricing their products can move the exchange rate. How multinationals can overwhelms the trillions being speculated doesn't quite add up. More interesting is Mike's story of how a friend of his, a serious player in foreign exchange, explained that a $1 billion central bank intervention is extremely significant in moving the exchange rate. Again, how can a one time intervention of a puny $1 billion overwhelm the trillions being speculated every day? Evidently I am missing something. To save any embarrassment, I hope it isn't something completely obvious.

So Mike, Matt, Tom, Neil, Auburn, all of you battle hardened MMT warriors, what's the deal here?

st hs said...

I'm guessing the same way a sheep dog herds sheep. It may just be one dog but if it can move just a few sheep it can move the herd.

Matt Franko said...

"But what is the main determinant of an exchange rate?"

Terms of trade for products as priced in the importing nations currency....

Matt Franko said...

From the BOE paper on Leverage Ratio:

"The FPC recommends to the PRA that, when applying its rules on the leverage ratio, it considers allowing firms to exclude from the calculation of the total exposure measure those assets constituting claims on central banks where they are matched by deposits accepted by the firm that are denominated in the same currency "

So banks become OVER capitalized when their assets gain value priced in the import nations currency terms and they will then shed reserve assets in that currency in order to maintain a near constant Leverage Ratio...

So if Toyota prices are solid/up in he US, the US division of the Japanese bank financing them in the US become OVER capitalized (or UNDER leveraged dependending on if you look at it via numerator or denominator) and that US division will exchange USD reserves at reduced terms...

Matt Franko said...

John, betting on Manchester does not make them a better team....

Matt Franko said...

The soccer (football) game is played on the field not in the gambling parlors...

The banking system is the field, the FOREX ECNs are gambling parlors...

John said...

Matt, apologies if I'm being unnecessarily obtuse, but that doesn't appear right. I don't dispute your explanation. It's that I don't understand it, and don't understand why it should be the case.

The speculators money comes from somewhere, i.e. the banking sector, and will eventually flow back to somewhere, i.e. the banking sector. Whether through borrowing, moving their own funds or its eventual return back to their bank accounts, it always makes its way back home to the banking sector, and so in in no different a position than the multinationals. While it is true that gambling on a team does not make the team any better or weaker, it doesn't seem to be the case that your analogy carries over to exchange rates. No matter how you cut it, everything eventually goes through the banking sector.

But why should a multinational be able to move an exchange rate but not a group of speculators exchanging the same amount of money? For example, and it's something you yourself have explained, if a large enough actor like VW or group of actors like the whole German car exporting sector increases/decreases their sales that will show up in the exchange rate. After all, they have to exchange the money earned, dollars in the US, back into Euros at home. That's fine. Now, why shouldn't a group of speculators exchanging the same amount of money that has accrued elsewhere to, say, VW or the German car exporting sector not also move the exchange rate? It seems to me that they're both doing exactly the same thing, yet only one of these actors is an influence on the exchange rate.

Matthew Franko said...

" German car exporting sector increases/decreases their sales"

But at what PRICE?

"its about PRICE not quantity..."

In other words, the producers can decrease the PRICE and that can result in increased sales for the producers....

Like if Daimler reduces the price on their C-Class here by $1,000 they might sell MORE units but make LESS per car...

The terms of trade are a PRICE matter not a revenue issue...

The asset value of a loan on a bank balance sheet financing the C-Class is not solely based on how much loan balance they have outstanding, it is also based on the current PRICE of the items that are being financed and other terms like the rate, term, risk free rate, etc...

Banks have to respond to changes in pricing strategies of the producers in order to maintain an optimal Leverage Ratio, so if the producers can get a price increase, the banks would shed reserve assets in the currency the price was increased in as they would be OVER capitalized in their USD operations...

Tom Hickey said...

Matt, you have a theory. You need to make the case based on evidence as in an article or study.

Jose Guilherme said...

Suppose a German investor decides to buy shares in the US stock market or opens an account at a NY bank.

These transactions have got nothing to do with trade flows (they're financial account transactions involving assets, not current account transactions involving goods and services) - yet they influence the exchange rate as much as trade in goods does.

Indeed they influence more - because they're 60 times as large as transactions in goods/services.

The obsession with trade in goods as the main determinant of exchange rates was perhaps correct in the Bretton Woods era but seems to be an incomplete and somewhat biased description of how the real world functions today.

Matthew Franko said...

If you believe that the ECNs set the exchange rates, then you also HAVE TO believe in the "bond vigilantes!"... you cant have it both ways..

Tom Hickey said...

You seem to be saying that the foreign exchange rate is set at the margin of the goods market in the importing countries by exporter changing their prices in relation to shifting conditions and the transmission to the fx market is through banks.

This is not intuitively obvious and seems counterintuitive in that the international trade market makes up only a small percentage of fx transactions.

If that is the thesis, then some numbers are needed to make the case relating marginal prices in goods markets to the fx market.

Matthew Franko said...

"they influence more - because they're 60 times as large "

Its about PRICE not quantity...

Matthew Franko said...

Here worlds richest man Warren Buffet:

"if the govt came out and said they were going to set interest rates at 0% for the next 50 years the Dow would go to 100,000..."

What does he say that? Because he thinks that there is a functional relationship between the risk free rate the the volume of share transactions?

Noooooo....

Does he KNOW that there is a functional relationship between the risk free rate and the PV of the next 50 years Dow Jones firms earnings flow?

Yeeeeeessssssss....

Matthew Franko said...

"You need to make the case..."

I'm not in the academe Tom...

Matthew Franko said...

So Tom you are saying that the best way to communicate an explanation of a complex system is via an academic paper?

So the Boeing 777 detailed design documentation is in the form of an academic paper?

Tom Hickey said...

Matt, I am just saying that until a case is made that can be countered, it's either tautologous or baseless assertion.

To paraphrase Feynman, the purpose of doing science is so that we don't fool ourselves.

Tom Hickey said...

So the Boeing 777 detailed design documentation is in the form of an academic paper?

Engineering is based on physics, in the first place, so they didn't just sit down and draw pictures, and secondly, you can bet that they tested every step of the design process rigorously.

One of my cousin's sons works for United Aircraft as a model builder. They model all the component for prelim testing before fashioning them in metal for more rigorous testing. An aircraft is probably the most "scientific" item out there other than a rocket.

Tom Hickey said...

To put it another way, "It's about price not quantity" is rote without providing an argument based on reason and fact.

Matt Franko said...

""It's about price not quantity" is rote"

Well that is an explanation for rote learners...

When I am saying to compare the ratio of current measured USD value of a bank asset class to declared measure in USD of bank capital and then compare that ratio via an inequality to the target ratio then that is not using rote... that is using an inequality...

So you have to try to decide via which method of communication about the matter is optimal for success.... I don't think words (rote) is ideal in these matters and in fact looks like a waste of time to even attempt it...

Tom Hickey said...

Well, you have put forward a thesis. What some people here are saying is that it is not convincing from what they know about it.

John said...

Matt, that was a typo: I meant "price" not "sales".

Now, if a large multinational increases or reduces its *price*, that'll move the exchange rate. I accept your reasoning here, but you go on to assert a lot of stuff. Assertion is not an explanation.

The issue is simply that the speculators are also, by their very actions as speculators, changing the *prices* that they accept, thus in no way different to the central banks or multinationals influence on the exchange rate. Whether this is done on an exchange or wherever doesn't change the fact that the money eventually flows to the banking sector. Where else could it go? So it can't be that the actions of multinationals and the central banks influence the exchange rate but the actions of speculators do not.

It seems that there must be something else going on, and it's not quite as simple as you make out. What you say may have a good deal of insight but it isn't completely satisfactory. Take the example of Mike's friend and source about exchange rate movements. If what he says is true, and I have no reason to doubt it and every reason to believe it, then this is empirical evidence that the exchange rates are pretty much, though perhaps not entirely, explained as you say. If as this source attests, a realtime and empirically verified $1 billion central bank intervention can move the market while the trillions of dollars speculated every day do not, then that is an extraordinary finding. I've never seen that argued elsewhere other than here at MNE, and you'd think that such a finding would be shouted from the rooftops by everyone in the heterodox community, since it revolutionises the way we think about exchange rates, money, trade, etc. It could be that your explanation is coincidental, and other things are also happening. It could be that you're bang on the money, in which case you and Mike deserve a Nobel, although insightful economics usually rules you out for the prize.

Matt, you do yourself a disservice when you say "I'm not an academic" or "I'm a numbers guy, not a writer" or similar things. When you put in the effort, you're a decent, clear and intelligent writer. So come on spell it out in an essay of no less than ten thousand words by Monday. Mike if you've laid all this out in one of your monthly reports, remember it's the season of Christian charity, so cough up! PS. I miss the beard. You looked like a prophet, which I suppose is what you in fact are, and as such no one listens except for a few disciples.

Matt Franko said...

John, if we were in a conference room with a 12' whiteboard and a brand new box of multicolored dry erase markers I think I could communicate better and the board would contain very few words but a lot of numbers and symbols, diagrams and tables when I was done....

I believe those forms are a better way to communicate on this matter of how our present numismatic system is operating.... words are at least not ideal and perhaps useless as this has been the the history and we are getting nowhere in 20+ years....

time to change up the methodology imo....

Tom Hickey said...

Most econ and finance papers are math-heavy. Then the formal model is compared with empirical data. It is the only way to be precise when dealing with price and quantity in a way that can be compared with facts.

Neil Wilson said...

John t Harvey's book is about the best description of the capital flow process there is. But we will never be able to show how a highly dynamic structure like the currency markets work until we have an actor level computer model to work with. And building one of those is slow going to without funding.

John said...

Neil, does Harvey tell the same story that we're hearing here: speculators can't change the exchange rate because betting on an exchange has no effect on the exchange rate? If his book is about capital flows, then it would seem that he believes the speculators are an important factor.

John said...

Neil: "And building one of those is slow going to without funding."

Would anyone know where to start? I was under the impression no one has the foggiest idea about exchange rate movements, and if they did they'd keep it quiet and make a gazillion. That is is just too complex a system. Anyway, try your luck by writing a nice letter to Warren, unless he's figured it all out already for himself!

Jose Guilherme said...

speculators can't change the exchange rate because betting on an exchange has no effect on the exchange rate?

Speculators are not only "betting" - they are buying or selling the currency.

It's definitely not a case of simply betting on the outcome of a game - they are a key part of the game itself.

Also, speculation is not the only purpose for buying or selling - hedging is as important a motive as speculation, in a world of constantly moving, unpredictable floating exchange rates.

And note the contradiction in the camp of those who argue that the key factor for exchange rates is the change in the prices of traded products: they also admit that central banks, by buying and selling currency, can dramatically affect the exchange rate. Since these operations (like speculation and hedging by private agents) have got nothing to do with trade, it follows that trade cannot be the main determinant of exchange rates.

In fact, the true causal nexus is the other way around: it's exchange rates that determine the real terms of trade. And financial flows are the key determinant of exchange rates.

A recent and very illustrative example (among many) in an emerging market shows us how it works. In 2015, when the rating agencies downgraded Brazil's foreign debt, the Real immediately went on a nosedive and for a prolonged period. It was clear at the time that prices of traded goods didn't play a significant role in this, because their volatility was low. It was all caused by private agents buying dollars and selling Reais (the Brazilian central bank, though awash in dollar reserves, essentially adopted a posture of benign neglect during this episode).

Matt Franko said...

John,

Warren says about Forex: "makes dollars easier to get" or "makes dollars harder to get" which is a violation of his own rote statement "it's about price not quantity" , which I think is true but he seems not able to consistently apply this statement of his...

Matt Franko said...

"And note the contradiction in the camp of those who argue that the key factor for exchange rates is the change in the prices of traded products: they also admit that central banks, by buying and selling currency, can dramatically affect the exchange rate."

Whoa there big fella... we say Central Banks can SET the exchange rate.... TO.... THE....PENNY....

IF, and I repeat IF, the CB choose NOT to set this price and delegate this price setting authority to their fiscal agents to administer (like the US/Japan/EZ typically does) THEN, as these agents have fixed capital that these AGENTS have no choice but to leverage against, in order for all of them to seek to maintain a stable Leverage Ratio they have to exchange Central Bank liabilities (reserves) WITH OTHER FISCAL AGENTS at a price that is a ratio of their (fixed) capital and the current fluctuating value of their OTHER assets which the agents DO NOT CONTROL...

So if assets in the agent's USD zone institution increase in USD value, the agent will shed USD reserve assets (TO OTHER AUTHORIZED AGENTS) to maintain a constant LR ... if the assets in the agent's USD institution decrease in USD value, the agent will seek to acquire USD reserve assets (FROM OTHER AUTHORIZED AGENTS) to maintain a constant Leverage Ratio...

The agents only perform this function IF the CBs delegate the authority to set the exchange rate to the agent's...

Matt Franko said...

Brazil's currency took a nosedive in 2015 because they lost their terms of trade for oil priced in USDs...

If oil was still at $100+ believe me there would have been no nosedive...

And the female president wouldn't be in jail either...

Jose Guilherme said...

we say Central Banks can SET the exchange rate.... TO.... THE....PENNY....

In theory a central bank can prevent its own currency from appreciating. The Fed, the BoE or the central bank of Brazil can create all the dollars, or Pounds or Reais that they want, sell them on the foreign exchange market and thus prevent an appreciation of their currency.

But central banks lack the unlimited amount of ammunition necessary to fight a speculative attack against their own currency. See the case of the BoE in the 90s, when speculators led by Soros forced the UK out of Europe's exchange rate mechanism (the ERM).

The BoE had a limited amount of dollar and DM reserves - and it does not create dollars or DMs out of thin air. At a certain point it had no more reserves left to sell on the foreign exchange markets in order to defend the Pound's exchange rate. It thus had to cry "uncle" to Soros and other private operators - and give up on the parities for the Pound required by the ERM.

And btw this was another instance of financial flows - not trade flows - determining the exchange rate.

Tom Hickey said...

Now they would handle that with swaps between central banks?

Seems that's what happened during the GFC with the Fed making USD liberally available to other central banks using currency swaps.

Jose Guilherme said...

Brazil's currency took a nosedive in 2015 because they lost their terms of trade for oil priced in USDs...

The price of oil is basically irrelevant for Brazil's BoP, because the country is not a net exporter of oil. It imports about as much of it as it exports.

And the "female president" (Dilma Rousseff) was impeached but is not "in jail".

Matt Franko said...

Jose here:

"when the rating agencies downgraded Brazil's foreign debt, the Real immediately went on a nosedive "

You manifestly believe the bond vigilantes are real....

Jose Guilherme said...

they would handle that with swaps between central banks?

Those swaps are not in unlimited amounts and their purpose is to provide emergency support for the financial sector (in case national financial institutions suffer a liquidity crunch because of debts in foreign currency suddenly coming due).

Foreign exchange intervention/manipulation isn't included in their objectives.

Jose Guilherme said...

Bond vigilants are real

Bond vigilants are irrelevant - they are powerless against a central bank that can freely expand its balance sheet to set Sovereign Bond prices and yields at the level it desires.

But central banks are under constraint in what concerns foreign currencies. They can create domestic currency out of thin air but not foreign currency - their firepower in this area is limited by the amount of foreign currency they already hold as reserves and by the willingness of other central banks to lend them some more.

Matt Franko said...

"Now they would handle that with swaps between central banks? Seems that's what happened during the GFC with the Fed making USD liberally available to other central banks using currency swaps."

Yes imo Tom and at an exact exchange rate....

Jose as far as the BOE thing, if the US and German CB would have cooperated with the BOE then it would have turned out differently...

As they didn't then it was left up to the banks to work it out as they were able to do with their effectively fixed capital and a fixed target for Leverage Ratio... you have to look at other concurrent phenomenon ....

So I found this: "Although it stood apart from European currencies, the British pound had shadowed the German mark in the period leading up to the 1990s. Unfortunately, the desire to "keep up with the Joneses" left Britain with low interest rates and high inflation. Britain entered the ERM with the express desire to keep its currency above 2.7 marks to the pound. This was fundamentally unsound because Britain's inflation rate was many times that of Germany's.

Read more: How did George Soros "break the Bank of England"? http://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp#ixzz4eN8XNplX
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So as U.K. had prices of assets increasing robustly (what is termed "inflation"), the U.K. bank assets in GBPs would have been increasing and the UK banks would have been trying to shed GPB reserve assets to maintain a stable LR so that leads to a weaker GBP.. they were probably raising rates to combat the "inflation" thus adding fuel to the fire, etc...

Matt Franko said...

" their firepower in this area is limited by the amount of foreign currency they already hold as reserves and by the willingness of other central banks to lend them some more."

Well it's the same for the member institutions aka fiscal agents too... even more so... this is my point...