More Tensions on the Currency Front

A scan of various news stories shows obvious signs of continued jockeying on the currency front.

Bloomberg reports that the BRICs (at least according to Russia) aren’t at all receptive to US efforts to weaken currency controls. The US position, as presented by Timothy Geithner, is that undervalued currencies (meaning the renminbi) produce can produce inflation and asset bubbles. Hhhm, yet the US seems to be going about this in reverse order, trying to stoke asset values to stimulate spending, to produce inflation, and the officialdom seems not to care much if the value of the dollar is collateral damage.

Japan tried this game plan, to use asset inflation to create a wealth effect to increase consumption, in its bubble years. We know how that movie ended.

But the efforts of various countries to stoke their economies via loose monetary policies is fueling speculation rather than much in the way of real economic activity at home, and thus are also producing nasty cross currents and tensions. Per Bloomberg:

The BRIC countries are united in opposing U.S. efforts to weaken or eliminate mechanisms to control currency fluctuations, Russia’s Finance Ministry said.

Brazil, Russia, India and China will put up “strong resistance” to attempts to make a “harsh appraisal” of currency controls at the annual meeting of the International Monetary Fund and World Bank this week in Washington, Deputy Finance Minister Dmitry Pankin told reporters late yesterday.

The BRIC countries “have agreed on a position that exchange rates aren’t themselves a problem,” Pankin said. “Rather they are a consequence of deeper processes, such as tendencies to save, to invest, of the investment climate.”

China, the focus of pressure to let its currency appreciate, has suddenly backed off its typical belligerent tone. I suspect this is merely a stalling tactic, to get past the mid October date when the Treasury is under pressure from Congress to opine on whether China is a currency manipulator. And for good measure, it will probably try to look a tad more cooperative though the Congressional mid-terms, then revert to form. China has allowed its currency to rise a smidge more (a 2% appreciation since last June), which Geithner deemed to be insufficient. The IMF has also deemed it necessary to put a bit of pressure on China. Per the New York Times:

The head of the International Monetary Fund urged China on Thursday to allow its currency to rise in value, an attempt to keep a contentious issue between the United States and China from broadening into a bitter international dispute…

“The momentum is not vanishing, but decreasing, and that is a real threat, because everybody has to keep in mind this mantra that there is no domestic solution to a global crisis,” he said at a news conference as around 13,000 officials, executives and other participants gathered here for the annual meetings of the I.M.F. and the World Bank.

“Many are talking about a currency war,” Mr. Strauss-Kahn acknowledged, adding: “What we all want is the rebalancing of the global economy, and this rebalancing cannot happen” without “a natural consequence of it, which is a change in the relative value of currencies.”

While some analysts signaled they thought China could tolerate a rise of 5% to 8% a year, Prime Minister Wen had argued yesterday that the move would lead to too much domestic unemployment. But what about the unemployment in its trade partners? We are finally getting to the core issue: that a chronic trade surplus country exports both goods and unemployment.

Another sign of a wee (and perhaps short lived) climbdown by China was its sale of short-term Japanese investments. Hefty buying by China has pushed the yen to high levels which are particularly damaging to its economy (although given the long lead times in trade, it will take a while for the full effects to be felt). Fedwatcher Tim Duy had also argued that this was a clever way for Japan to do the dirty work of buying US dollars. Rather than have China accumulate dollars, proof of its manipulation of the dollar exchange rate, the new plan appeared to have been China buys yen, Japan sells yen to manage its value back down and buys dollars. However, this shift may be temporary; it may take time to discern what the Chinese posture really is.

Originally published at naked capitalism and reproduced here with the author’s permission.