Currency War - It had to happen, Smoot Hawley 2010

We were initially impressed at the equinimity with which global policy makers treated each other at the outset of the global financial crisis. Possibly this was because it came on the Big NATO economies so fast that G8 became G20 so quickly that they all looked around and whistled dixie rather than be the first to be obviously self interested.

Or it could be the timing of the GFC. Coming at the end of the Bush Presidentcy and during a Presidential campaign both cnadidates, McCain and now-President Obama, wanted to look Presidential instead of partisan.

Two years down the track however when Governments have been turfed out for the hardships that trying to fix their economies have wrout on their citizenry and with this global maliase looking like it has years to run the collegiate atmosphere looks to be breaking down.

We always thought it would be the case. Self interest is such that there was no other way. The currency devaluation race was an obvious first break from the largesse of 2008 but as we all talk about "currency wars" it now seems to be degenerating into a farcial self interested mess. The UK Telegraph has a story today with some quotes from the IMF http://www.telegraph.co.uk/finance/economics/8048996/IMF-chief-Dominique-Strauss-Kahn-warns-global-economic-co-operation-is-falling-apart.html

"After the early united front to stem the global collapse in 2008, "the momentum [of economic co-operation] is decreasing", Dominique Strauss-Kahn said at the IMF's annual conference in Washington...That is a real threat. Many do consider their currency a weapon. That is not good for the global economy… There is no domestic solution to a global crisis."

The question of is this a rerun of "Smoot Hawley" from the '30's is less relevant than is this going to weaken the global growth outlook. The answer to both however is yes and the we think that as Reinhart and Rogoff (and David Hackett Fischer back in 1996) suggested the world has many more years of economic weakness in front of it.

The paradox of thrift tells us that what is rational at an individual level can be counter productive at an aggregate level. Such is the case with currency devaluations and aggressive trade policies. The IMF downgraded the growth expectations for the next year this week. We think, unfortunately they will have to do it again. This feels like 2008 again. Lets hope we are wrong.