Back in the 30’s Governments of all stripes around the world erected trade and tariff barriers in order to try to protect their domestic industry and economies from the worst of the Depression that was sweeping the world. Of course the unintended consequence of this was the opposite effect which lead to slowing trade and economic growth and as such was a self defeating shot in the foot which probably made the Depression worse than it should of, could of, would have been.
In this latest “Great Recession” governments have made it clear that they were not going to make the mistakes of their predecessors in aggressively pursuing self interested trade policies but this has not stopped them relying on currencies to do the job for them. Indeed if you were to ask what’s the difference between the UK , Greece and Spain the answer would come that while they each have economic, budgetary and debt problems at least the UK can let its currency go to stimulate exports.
Just look at the drop in Sterling (chart below) from around 2 when the GFC kicked off to around the 1.50/55 region that’s a rough 20/25% fall. Certainly the Euro has also dropped by a little under 20% but arguably Greece and Spain need moves of double this at least to help get out of their mess. But Germany on the other hand is more than happy with the performance of the Euro and the impact on its exports recently and in the face of the weak growth profile of its near neighbours. The Japanese on the other hand have had the opposite problem with Dollar Yen moving from 110 to around 83 before this week’s intervention. That is a whopping appreciation of 25% with the associated loss of competitiveness that goes with it.
Source: Bloomberg, Spotlight
So it’s no surprise that the Japanese intervened yesterday. But this, along with the Chinese intransigence and unwillingness to let the Renmimbi find its true value, may presage a coming currency war where each Government is seeking to competitively devalue its currency in order to stimulate trade related growth.
Earlier today we posted a link to a page on Bloomberg that considered the Japanese intervention yesterday that pushed Dollar Yen and Euro Yen sharply higher. Today we see stories in the Press that there will be further intervention and renewed and refreshed Japanese Prime Minister Naoto Kan said that “We’ll continue to take decisive measures when necessary...If rapid Yen movements hurt the desire of Japanese companies to invest at home, employment conditions will get worse.”
Now we understand the Japanese desire to keep its currency as weak as possible particularly after a decade of economic stagnation and in truth against an appreciation that seems un warranted given relative economic outcomes but is this just the thin end of the wedge? In the run up to the November mid-term elections the United States is becoming less tolerant of the Chinese stance on its currency and as the rhetoric grows so do the risks to the global economy.
Today’s edition of the New York Times is running a story on this very topic and says “The Obama administration is moving to take a harder stance on the Chinese government’s trade and currency policies, with anger toward China rising in both political parties ahead of midterm elections.” Indeed we know, because Treasury released statements overnight that US Treasury Secretary Tim Geithner is going to say before House and Senate panels tonight that ““We are concerned, as are many of China’s trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited,”
The US Treasury danced around the subject of currency manipulation by the Chinese already in the last few months but it is clear that the aggravation level is growing in Washington. The New York Times says “The United States brought two cases to the World Trade Organization on Wednesday, accusing China of improperly blocking imports of a specialty steel product and denying credit card companies access to its markets. The move came just hours before House lawmakers demanded action on the currency issue.” It further goes on to say that “Senator Charles E. Grassley of Iowa, said, “It’s about time the administration decided to act. Mr. Grassley added: “The administration should go one step further and bring a case against China’s unfair currency manipulation at the W.T.O.”
With the Tea Party getting up its candidate on the Republican Ticket for the Delaware Senate race it may be the case that the energy being shown in conservative ranks cause the GOP to lurch further to the right and take the Administration and Democrats with them in the run up to the mid-terms.
The Japanese intervention yesterday and the increasing noises from Legislators in the US suggests a dangerous flouting with policies that will not help engender global growth. None of this is good for the global economy at the point when the chances of a double dip in the US are getting dangerously close to 50:50 and where Europe and Japan remain essentially stagnant. What the world needs is a focus on growth and jobs not currency manipulation and competitive devaluations. Governments need to deal with their own internal lack of aggregate demand first rather than try to poach demand via competitive devaluations and artifically low currencies.
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