An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
In the ‘currency wars’ discussion, it is almost taken for granted that exchange rate depreciations will result in non-trivial export gains. Using evidence from countries in Europe and Asia, this column argues instead that factors unrelated to prices/exchange rates often play a predominant role in shaping trade developments. Moreover, these factors affect export outcomes in a very diversified manner across countries, in part because of the interplay of global value chains.
So much for that theory.
vox.ue Fighting ‘currency wars’ with blanks: The limited role of exchange rates in export competitiveness Filippo di Mauro, Konstantins Benkovskis, Sante De Pinto, Marco Grazioli
If rate cuts and currency-market interventions don’t do the job, capital controls -- the introduction of taxes and prohibitions to regulate the flow of money into and out of a nation -- may creep higher up the agenda of increasingly desperate central banks.
Three years ago, the International Monetary Fund softened its strict opposition to such strategies, conceding that "in certain circumstances, capital flow management measures can be useful," with the caveat that "they should not, however, substitute for warranted macroeconomic adjustment."
Further sign of a breakdown of the neoliberal order? The big boys love neoliberalism until it hurts them.
Is Russia laughing up its sleeve? Reminiscent of Br'er Rabbit pleading with Br'er Fox not to throw him in the briar patch.
So the Central Bank of Russia has been selling $20 billion of its stash of foreign currency and buying rubles to mop them up and relieve some pressure. But rather than trying to stop or reverse the ruble’s decline, the Central Bank appears to be managingthe decline. A sudden crash of the ruble could have chaotic consequences, while an orderly decline in the middle of a currency war may well be just what it wants.
Yves here. While I have every reason to assume the Russians mean to act on the currency front, on the surface, the remarks Wolf discusses in his post appear to be based on a misapprehension. First, Russia does not have the ability to tank the dollar, and a modest depreciation would be a plus for the US export sector. Second, the US is not dependent on foreigners to fund its fiscal deficits (we will not take the space to explain here, but we’ve gone over this terrain extensively in other posts).
However, there is a third possibility: that Moscow knows the economic reality full well, and is using aggressive “target the dollar” talk to shore up the ruble, which has fallen sharply and is far more exposed to speculative attacks than the world’s reserve currency. Russia’s best economic defense is not in the currency markets, but its ability to withhold oil and gas from Europe, which already has a flagging economy and is not well positioned to take a shock in terms of much higher energy prices.
The "bubble" that Gundlach sees in central banking is the result of pushing monetary policy to the extreme, which is not working to stimulate domestic economies. The Fed admittedly tried to stimulate the economy by increasing the wealth effect through driving equities higher than they would be otherwise, as well as supporting housing through low mortgage rates. That has not worked to increase nominal aggregate demand or even to keep the inflation rate at the Fed's target of 2% and now deflation threatens.
The sectoral balance approach reveals that if the domestic private sector wishes to net save, including deleveraging, then the government or the external sector must make up the difference due to demand leakage to saving.
However, in a political environment of fiscal austerity, the government's hands are tied by the political process. That leaves the external sector, meaning increasing exports.
Not everyone can increase exports in a global economy that is slowing, as Gundlach observes. Therefore, some countries will attempt to increase exports by lowering prices indirectly through currency devaluation.
Germany was able to devalue some time ago by switching from the DM to the euro, ensuring its position as a net exporter. China supported its export industries through a peg to the dollar that prevented the currency from rising in the market relative to China's growing position.
Now Japan has taken steps to bring down the value of the "too strong" yen, apparently with the blessing of Washington, or at least without objection.
Is the world approaching the point there is going to be push back? Gundlach thinks it's a strong possibility.
It's time to recognize the insufficiency of monetary policy, as Bernanke himself has admitted, and move to a sectoral balances-functional finance approach fiscal policy in order to offset demand leakage to saving and stimulate effective demand instead of pursuing a mercantilist policy that will only lead to further international imbalance, political recrimination, and possible trade war.
But the trickle could soon turn into a flood. The speculators of the world have been told by the new head of the BOJ, Haruhiko Kuroda, that they can now speculate with borrowed yen which has not only no cost but no currency risk. The borrowings, then, could be infinite. The foreigners increased their holdings of Japanese Government Bonds from four percent to nine percent in the two years before the break. No doubt much of that was sold on the break.
And the BOJ may well lose control of the pace of the descent in both the yen and JGB market. The Japanese domestics with a lag might start to sell big time. The faster and farther the yen falls the more likely that will happen. The situation is now very unstable. A deeper fall in the yen is going to force all of emerging Asia into a devaluation and that is gong to cause big problems down the road in places like Europe, particularly Germany.
Maintaining a non-cooperative equilibrium is a challenging exercise. Not only will every individual partly have to constantly monitor what everyone else is doing, but in addition, there is a constant risk of escalation into protectionist policies. Trade disputes are already on the rise. The number of WTO dispute cases in 2012 was the highest in 10 years.
WASHINGTON, DC - Much of the hype surrounding last month's meeting in Moscow of G-20 finance ministers and central bankers was dedicated to so-called "currency wars," which some developing-country officials have accused advanced countries of waging by pursuing unconventional monetary policies. But another crucial issue - that of long-term investment financing - was largely neglected, even though the endgame for unconventional monetary policy will require the revitalization or creation of new long-term assets and liabilities in the global economy....
... global leaders should work to maximize the liquidity that unconventional policy measures have generated, and to use it to support investment in long-term productive assets.
Caijing Currency War and Peace Otaviano Canuto | Vice President for Poverty Reduction and Economic Management at the World Bank
Now Mr Weidmann would like to see austerity policies in all deficit countries as the preferred tool of adjustment. However, this adjustment has caused mass unemployment in the European deficit countries and falling GDP with no light at the end of the tunnel so far. This, I believe, is the background of the conflict in the ECB. Some, like Mr Weidmann, are calling for internal devaluation policies, while others, like Mr Constâncio, are more open to other ways of economic adjustment.
By the way: there is a clear distributional effect of this choice. Adjustment by austerity leaves capital owners in surplus countries unharmed (at least it seems so to people who do not understand theparadox of thrift) while it hurts workers in the deficit countries. Adjustment by exchange rate changes leaves nominal wages untouched, but some capital owners in the surplus country lose because their investments in the deficit country are now worth less in domestic currency. However, while there is proof that the second avenue works the first – austerity – is without theory. There is no theory of expansionary austerity – it is all wishful thinking.
The crux of it:
When the euro system was introduced, many feared that some people in the ECB would think along national lines only, favoring policies that benefit only their country. It seems that this situation has now arrived.
econoblog101 Austerity for all? Dirk Ehnts | Berlin School for Economics and Law in Berlin
There is much hype about “currency wars” in the international media this week, reaching the heights of the Davos gathering. The excitement seems to have been started by Bundesbank president Jens Weidmann, who earlier this week aired his concerns about an apparent politicization of exchange rates owing to an erosion of central bank independence and rising political pressures for more aggressive monetary policies.
Not many countries nowadays seek a strong exchange rate; a few, including systemically important ones, are already actively weakening their currencies. Yet, because an exchange rate is a relative price, all currencies cannot weaken simultaneously. How the world resolves this basic inconsistency over the next few years will have a major impact on prospects for growth, employment, income distribution, and the functioning of the global economy.
The head of the Bank of England warned on Monday that too many countries were trying to weaken their currencies to offset the impact of the slow global economy and the trend could grow next year.
