Guest blog: More signs of the currency war

November 19, 2010 · Posted in The Capitol · Comment 

In my post yesterday, I noted that many are now
asking whether there is a real and possibly rising risk of a currency war. I
further noted that contrary to the conventional wisdom which sees no outbreak
of one so far, my view is that we have been in a currency war for some time.

The Financial
confirms my view with a
from Seoul about the South Korean government’s imminent imposition of
capital controls in an effort to control inflation and the value of the won. In
particular, the article notes that South Korea is considering reinstating a 14
percent withholding tax on foreigners’ earnings from sovereign debt. This tax
had been removed last year in order to pave the way for Citigroup to list Korea
on its World
Government Bond Index
, which is apparently tracked by important investors
such as Japan’s pension funds.

Reimposition of the tax would forfeit this listing
and with it the chance to bring greater liquidity to the Korean bond market,
something the government has been pursuing for some time. But such liquidity
could also lead to a stronger won that would be a drag on Korean exports. So
apparently the listing and the greater bond market liquidity are being dropped
in favor of the exporters whose apparent concern is not so much the strength of
the won versus the dollar, but a possible rise of the won against the Japanese

Does anyone still believe we are not in the middle
of a currency war?

FP Passport

Currency wars and conventional wisdom

November 17, 2010 · Posted in The Capitol · Comment 

Yesterday I received one of those "Q and A" e-mails that think tanks
use to promote their views from the Carnegie Endowment yesterday. The first
question was: "What is the danger that a currency war could break out?"

Obviously the premise of this question is that there
is no such war at present. But wait a minute. The IMF says that China is
manipulating its currency. That means that China is constantly buying dollars in the global currency markets in
order to keep the dollar’s value artificially high versus the Chinese yuan. It
further means that China is doing this in order to indirectly subsidize its
exports and to accumulate large dollar reserves. Nor is China the only player
of this game. South Korea, Taiwan, Singapore, and even, upon occasion, Japan also
intervene in currency markets to be sure that their export industries remain

The intervention is always aimed at keeping the
value of those currencies versus the dollar somewhat lower than market forces
would dictate. In other words, these countries are all subsidizing their
exports into the U.S. market and into the markets of other countries like
Canada or Australia or Norway, for example, that have freely floating
currencies. This subsidization is a beggar-thy-neighbor  policy that aims to create jobs at home by expropriating
those of the importing countries. It is a strike at the competing industries in
floating currency markets that would be competitive in the absence of the
currency manipulation.

Now what would you call this — a currency war
maybe?  Well, according to Carnegie Encowment economist Uri Dadush, you’d be wrong if you did. Dadush says that while there is a
significant risk of a currency war breaking out, we’re not there yet.
Apparently that can only happen if the U.S. decides to play tit for tat.

An even better example was the story that I’m sure
many of you saw on the front page of yesterdays New York Times business section
titled, Few Jobs Seen in a Weaker Dollar. I was particularly
interested in this story because it had run originally in the International
Herald Tribune
and had contained a quote from, well, me. Naturally when I saw
it again in the Times, I turned eagerly to the inside jump page to see my name
in print once again.  So you also know
how disappointed I was to see that my name and quote had disappeared from the
Times edit of the story.

According to the Times version all economists share
the view that a weaker dollar — meaning no currency manipulation by China or
others — would have little if any affect
on either the U.S. trade deficit or U.S. job creation. So, whereas the Dadush was saying that we’re not yet in a currency war, the Times was saying
that maybe there is a war, but even if the currency manipulators stopped their
attack, the effect on the U.S. economy would be negligible. So, maybe we’re not
at war, but if we are, don’t worry about it. This is the conventional U.S.
economic wisdom as handed down by two pillars of the establishment.

The Times essentially said that exchange rates no
longer have much effect on trade flows because global companies produce in most
of the major markets into which they sell and do not change production
locations in response to currency shifts.

In the original Herald Tribune article, I noted that exchange rates are
prices and that to argue that prices don’t matter is to argue that capitalism
doesn’t matter. Obviously, the apostles of the conventional wisdom at the Times
thought my comment undercut the preferred story line too much and removed it.
Or maybe they just had to cut the length of the article and my comments just
inadvertently wound up on the cutting room floor. Who knows?  But it doesn’t really matter, because the
story was so obviously incomplete to anyone at all familiar with global
production and marketing as to make one wonder if there are any editors left at
the Times.

Look, of course, global companies produce in a lot
of different markets. Toyota produces in Japan and in the U.S. for example. But
Toyota sells more cars in the U.S. than it produces in the U.S. and so do
Nissan, Mercedes Benz, and BMW. Apple produces some things in the U.S., but the
bulk of the products Apple sells in the U.S. are made in Japan, Korea, Taiwan, and
China. If this were not the case, how would the United States have chronic
trade deficits of over $ 600 billion? Does the Times think that Toyota would not
move more of its production to the U.S. if the yen doubled in value versus the
dollar? If Toyota did move more production here, would that no create U.S.
jobs? What am I missing here?

FP Passport

Morning Brief: G-20 rejects U.S. push on China currency

November 14, 2010 · Posted in The Capitol · Comment 

G-20 rejects U.S. push on China currency

Top news: Meeting in Seoul, the G-20 agreed on a broad set of economic guidelines but rejected a a U.S. push to pressure China to revalue its currency. The final agreement commits G20 nations to curb deficits and move toward more flexible exchange rates.

The final language did not include a pledge to refrain from "competitive undervaluation" of currencies, a phrase that the United States had wanted included to show that the body was taking a strong stand against China’s currency policies. It also included a suggestion to countries with widely used currencies like the United States to "be vigilant against excess volatility," a warning against loose monetary policy. 

U.S. President Barack Obama said the agreement showed that the G-20 countries are in "broad agreement on the way forward." Acknowledging the watered-down nature of the final proposal, he said, "Instead of hitting home runs sometimes we’re gonna hit singles. But they’re really important singles."

It has been a tough visit for Obama, who also failed to secure a free trade agreement with South Korea on Thursday. The president now heads to Japan for the Asia-Pacific Economic Cooperation summit, the final stop on his Asian tour.

Iraq: Nuri al-Maliki was finally renominated as Iraq’s prime minister after eight months of political deadlock.


  • Allies of imprisoned Burmese democracy leader Aung San Suu Kyi say an order has been signed for her release tomorrow. 
  • A new U.N. report alleges that North Korea exported nuclear and missile technology to several countries including Iran, Burma, and Syria. 
  • A massive suicide bombing on a police facility in Karachi, which killed at least 17 people, has been blamed on the Taliban. 

Middle East

  • A long meeting between Secretary of State Hillary Clinton and Prime Minister Benjamin Netanyahu in New York apparently failed to revive the Mideast peace talks. 
  • A Palestinian blogger has been arrested for criticizing the prophet Mohammed on Facebook.  
  • Iran has agreed to cooperate with a Nigerian investigation into a seized cache of weapons that could put in violation of international law. 



  • Following violent protests against tuition fee increases, David Cameron’s government announced additional cuts to Britain’s welfare system. 
  • At least seven people in Kosovo have been charged with being part of an international organ smuggling network. 
  • As Ireland’s economic woes worsen, the EU says it is willing to lend help "if needed."


TIM SLOAN/AFP/Getty Images

FP Passport

Currency Wars rap battle

November 13, 2010 · Posted in The Capitol · Comment 

The Taiwanese animators strike again, taking on the currency wars and the Nobel Peace Prize controversy:

The scary panda even has a cameo, unleashing a "smorgasbord of pain" on some Norwegian beauty queens.

Hat tip: Matt Yglesias

FP Passport

Currency War Rap

November 13, 2010 · Posted in The Capitol · Comment 

The currency war between the U.S. and China as described in rap.

Big Peace

Open the Pod Bay Door, Hu: President Obama Fails With Chinese Currency Manipulation Push, South Korean Trade Deal

November 11, 2010 · Posted in The Capitol · Comment 

Not a successful day in Seoul, South Korea, as President Obama isn’t able to get Chinese President Hu or South Korean President Lee to agree to measures to help American jobs. Our “World News” report: You can read more about…

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Currency Battle Rap

November 11, 2010 · Posted in The Capitol · Comment 


I will say, though, that looking at any trade-related issues as a question of “China” versus “America” is always misleading. Industry employes just 27 percent of China’s workforce. Almost 40 percent of Chinese workers are laboring in agriculture, together producing only 10 percent of China’s GDP and thus being quite poor. These people do not benefit from an undervalued RMB. On the contrary, the low price of the RMB further depresses the value of their already meager earnings. The main beneficiares of the cheap yuan are the owners of China’s exporting enterprises, and the people who work at our supply those enterprises. This, however, isn’t “China” it’s a particular set of politically influential Chinee people who have a dominant voice in China’s economic policy.

America has a bizarre cotton policy. But that’s not because “America” has decided that this policy is good for “America,” it’s because cotton-growers control the relevant levers of power.


Fox News Discusses Return Of Gold As Everyday Currency (VIDEO)

November 9, 2010 · Posted in The Capitol · Comment 

This afternoon on Fox News, host Stuart Varney and the network’s senior judicial analyst Andrew Napolitano had “The Gold Standard Debate.”

Napolitano, an advocate of returning to the gold standard, laid out his case for Varney, though he conceded there is currently a “lack of momentum” for the idea. Varney agreed that the country won’t go back to the gold standard “just like that.”

“That is not going to happen,” Varney said. But he did venture another idea:

“I can see the creeping use of gold as a medium of exchange,” Varney said. “For example, we’re about to see, on the streets of two cities in America, vending machines where you can put your dollars in and get out small amounts of gold.”

Varney must have been alluding to Gold to Go, gold vending machines produced by a German company. The machines are currently installed in Germany, Italy, Spain and the United Arab Emirates. CNBC reported in September that the company plans to issue machines in Florida and Las Vegas soon.

“Would you use one of those machines?” Napolitano asked.

“I certainly would,” Varney replied. “This is the first step towards using gold as a currency.”



Currency Wars Also Have Unintended Consequences and Collateral Damage

November 4, 2010 · Posted in The Capitol · Comment 

By Gerald P. O’Driscoll

The Fed’s planned purchases of $ 600 billion of long-term Treasury bonds were targeted for domestic problems, but are having international consequences. The expansion of the Fed’s balance sheet drives down the foreign-exchange value of the U.S. dollar, and (same thing) forces other currencies to appreciate in value.

Emerging markets with high short-term interest rates will attract “hot money” flows. These flows are not stable sources of funding, and disrupt the small capital markets in these countries. Long-term, the appreciation of their currencies harms their competitiveness in global goods’ markets.

Brazil has already imposed capital controls and other emerging markets may follow. The Chinese in particular have reacted sharply.  According to a Reuters dispatch, Xia Bin, adviser to China’s central bank, said another financial crisis is “inevitable.” He added that China will act in its own interests.

In short, the Fed’s actions have undone whatever good came out of the G20 meetings. Any hope for cooperation on currency values and financial stability is out the window. There are potential spillovers in other areas of global cooperation.

Currency wars, like other wars, have unintended consequences and collateral damage.  Some countries will predictably react by imposing capital controls.  Moves to curb imports can follow. Monetary protectionism leads to trade protectionism.

However it might like matters to be, the Fed cannot simply act domestically.  It has reached the useful limits of further easing.

Currency Wars Also Have Unintended Consequences and Collateral Damage is a post from Cato @ Liberty - Cato Institute Blog

Cato @ Liberty

Yes, China’s Currency Policy is a Problem

October 26, 2010 · Posted in The Capitol · Comment 

(cc photo by cliff1066)

I think a lot of the discussion of the issue has somewhat overstated the extent to which Chinese currency manipulation is a problem for the United States. So I guess it’s John Cochrane to the rescue with an op-ed that manages to wildly understate the issue. He starts with the odd premise that we should do a libertarian analysis of trade with a large dirigiste economy with a state-controlled banking sector:

How does anyone know if a currency is “undervalued” or not? The economists hidden away in the sub-basements of the IMF may try to decide what currencies “should be” worth across vastly different countries, but this is a hopeless task. Is $ 2 a day the “right” wage in China, or should that be $ 2.20 per day because the currency is “undervalued?” Good luck.

Indeed. Why not just leave the valuation of the currency up to the market? But has Cochrane not heard of the Chinese capital controls that are the crux of the issue here? The reason we don’t just leave this up to the market is that the Chinese government doesn’t let the market set the value of its currency. Instead the government sets the price. So while IMF economists can’t get the “right” value as well as markets might, they can still say “this price-setting is being done in a distorting way.”

Next graf, though, it seems Cochrane understands this perfectly well:

Why push China to manipulate its currency upward, but ignore its capital and exchange controls? We should push China to abandon those controls instead. A freely pegged currency is a great idea, especially for a fast-growing, trade-based economy with a weak central bank like China.

Why push China to manipulate its currency upward, but ignore its capital and exchange controls? Because nobody is doing this. What we’re asking China to do is to relax those controls. Should we push China to “abandon” those controls instead of asking them to relax them? Well, it’s hard to say what difference that would make.

To motivate the idea that there’s a disagreement here, Cochrane then finds himself bizarrely denying that Chinese bond purchases are an effort to manipulate their currency level. Like Brad DeLong I would urge him to discuss this with someone. Go to China. Talk to their Commerce Ministry. Talk to their Foreign Ministry. Ask a businessman. Nobody is confused about this. The policy is export-led growth and that means not allowing the currency to appreciate too rapidly.


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