This is another source of worry for the free world. Central bankers will never be able to withstand the winds of political and economic conflict from gross trade imbalances made worse by currency manipulation. And just imagine trying to get one nation’s taxpayers to pay for the mistakes of another nation’s politicians. Never happen. The historical result is a complete collapse of international cooperation. And sometimes world war. These guys are throwing gas on the flames.
Rumors of (Currency) War
G-7 finance ministers lament the rise of the monetary nationalism they all practice.
These days there’s not a market in the world that some regulator somewhere doesn’t want to meddle in. The big exception, curiously enough, is the currency market.
The finance ministers for the Group of Seven economic powers released a statement Tuesday washing their hands of responsibility for the value of their currencies: “We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates.” The intention was to calm global currency markets, but the result was even more turmoil.
And no wonder. Start with the basic fact that there is no such thing as a free market in paper currencies. Money is a commodity whose monopoly supplier is the state. Markets trade currencies—trillions of dollars every day—but governments and central banks have the biggest influence on their value by controlling their supply.
The G-7’s look-Ma-no-hands pose is fooling nobody who actually trades currencies, which is why exchange rates jump or fall these days based on the merest eyebrow twitch by Ben Bernanke, Mario Draghi or the other maestros of global money.
The G-7 statement goes on to say, “We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.” That’s another beauty. If the G-7 really wanted to return to stable exchange rates, they could do something about it. Their statement is a feeble attempt at open-mouth monetary operations that is a poor substitute for real policy.
The immediate cause of this G-7 eruption is Japan’s recent decision to join the rest of the world in monetary devaluation. New Prime Minister Shinzo Abe has been brow-beating the Bank of Japan to reduce the value of the yen, which had appreciated by more than 25% against the dollar from 2009 to late 2012. The yen has since fallen sharply, alarming Japan’s trading partners in South Korea and Europe.
Mr. Abe’s political intervention into central-bank independence is regrettable, but he’s merely joining the queue. Since the financial crisis, every major central bank has let itself become an agent of domestic economic policy. Mr. Bernanke’s Fed has led the trend, embracing near-zero interest rates for more than four years plus repeated “quantitative easing.”
The Fed is supposed to be the steward of the dollar, which is still the world’s reserve currency. But since the crisis Mr. Bernanke has all but declared that the rest of the world can take care of itself. So as the Fed has flooded the world with dollars, the rest of the world has had to ease as well to keep their currencies from rising too fast. Mr. Bernanke is the band leader in this round of monetary nationalism.
In the 42 years since the collapse of Bretton Woods—the postwar international monetary system anchored to the U.S. dollar—world leaders have played more or less the same game. The more respectable countries have insisted they believe in the virtues of a strong currency, while often secretly hoping for a weaker one to boost exports. The rest have simply resorted to devaluation when convenient, without the pretense of virtue.
Control of the money supply has only grown in importance as the size of government has increased: You have only to look at Greece to see what happens when you combine fiscal incontinence with a currency (the euro) that Greek politicians can’t manipulate. In the U.S. and U.K., a major side benefit for politicians of near-zero interest rates and bond purchases is that they help to finance huge government deficits at rock-bottom rates.
Fixed or more-stable exchange rates would impose a discipline on government spending that few politicians of any stripe really want. Thus the G-7’s putative defense of market-determined exchange rates is in part a veil for state manipulation of money in the hope of “managing” the economy. That hasn’t done all that much for growth in the past five years, so it’s no surprise that beggar-thy-neighbor devaluations look increasingly appealing to politicians.
It’s nice that the G-7 appreciates the dangers of currency war, but its Tuesday statement that “we will not target exchange rates” is a policy abdication. If the ministers really want to prevent “excessive volatility and disorderly movements” in currency markets, they would work together to coordinate their monetary policies to produce more stable exchange rates.
But that would require financial leadership, especially from the U.S. Treasury. If his Senate confirmation hearing is any indication (see nearby), Obama nominee Jack Lew is a babe in the monetary woods. He’s likely to continue the real G-7 policy, which is every currency for itself, the weaker the better.