Tag Archives: currencies

Things That Don’t Make Sense, Yuan Edition

“World Bank Chief Economist Justin Yifu Lin staked out a strong position against forcing China to let its currency appreciate as a way to rebalance the world economy.

“’Currency appreciation in China won’t help this imbalance and can deter the global recovery,’ he said in a lecture Monday at Hong Kong University.

“In an interview after the lecture, he said other countries shouldn’t intervene to keep their currencies cheap to boost their export sectors, calling it the ‘equivalent of protectionism.’”

You can read the rest at Real Time Economics. No, it doesn’t make more sense — except possibly as an expression of China’s policy.

By James Kwak

Protectionism by Another Name?

One thing you can probably get 99% of economists to agree on is that a global trade war in the middle of a global recession is a bad idea. If every country increases import tariffs, hoping to protect its domestic industry from foreign competition, global trade will fall in all directions, hurting everybody. Put another way, increased tariffs are a negative-sum game.

To date, we haven’t seen much in the way of higher trade barriers during this crisis, although you could argue that some bailouts constitute subsidies favoring local over foreign companies. Instead, however, we are seeing friction over currency valuations. If you want to boost your net exports but don’t want to do the obviously unfriendly thing and increase tariffs, the other option is to devalue your currency: a weaker currency increases the price of imported goods and reduces the price of exported goods, hence reducing imports and increasing exports.

Yesterday, Tim Geithner accused China of “manipulating its currency,” something we’ve heard periodically over the last several years but not in much in the last few months. (Of course, Geithner then said that “a strong dollar is in America’s national interest,” whatever that means.)  Switzerland threatened to intervene on foreign exchange markets to suppress the value of the Swiss franc. And the French finance minister criticized the U.K. for letting the pound depreciate. (Hat tip Macro Man for the last two.)

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The Quest for Global Balance

Even with all the chaos in the US economy these days, the G20 summit approaching this weekend is bringing the global financial system to the top of the agenda, at least for the few days. One of the issues of the past few weeks has been volatility in currency prices as (most) countries with overvalued currencies and large current account deficits see their currencies fall. The flip side of this situation is countries with undervalued currencies and large current surpluses – most notably, China. Arvind Subramanian presents one solution in the Financial Times: treat undervalued currencies as a form of trade barrier and manage them through the WTO.

Russia Tries to Stop Ruble from Falling, Gives Up

The emerging markets rout continues: Russia, she of the $500 billion war chest of foreign currency reserves, spent 19% of those reserves trying to fight off a currency devaluation. Today, Russia didn’t quite give up the fight, but conceded some ground, widening the allowed trading range and at the same time increasing interest rates. Just goes to show: fighting those nasty currency speculators rarely works, if ever.

(Thanks to Free Exchange for catching this.)

So Much Going on …

One of the challenges of the current financial crisis/credit crunch/recession/whatever you call the mess that we’re in is that there are so many things going on at once – stabilizing the financial system, housing, economic stimulus, regulation, emerging markets crisis, now incipient currency crisis, … Luckily, there are many other smart commentators out there working weekends when we all should be spending more time with our families.

On the topic of regulation and economic stimulus, Mark Thoma cites and expands on Larry Summers, who argues that we need to not just give the economy a boost in the short term, but take advantage of the opportunity to take steps – both investments and regulation – to boost productivity in the long term.

Mark Thoma (again) and Yves Smith both provide roundups and analysis of the currency crisis, which Simon raised a couple of days ago. Quick summary: it could be bad.

So if you can’t sleep, there’s plenty to read and worry about. (Or you could watch the World Series.)

Waiting for G7 Currency Intervention: It Won’t Be Long

Major currencies are on the move, big time, since yesterday.  The yen has risen to 91 yen per dollar (from 97) today.  The euro has fallen to nearly 1.25 dollars per euro (from 1.29).  You get the picture.

The G7 needs to slow down the disorderly run into the dollar.  This run is in danger of snowballing into a panic - as people fear further rises in the dollar (and falls in their local currency), they rush to buy more dollars (to cover debts in dollars and also to shift their portfolios), and so on.

Coordinated intervention, announced over the weekend most likely, will involve selling dollars, selling yen, buying euros and pounds.  This can calm things, by showing there are no one way bets.  (Will the Chinese be involved?)

But the global deleveraging (reduction in lending worldwide) will continue.  And this seems to involve more of a move into dollars that we previously thought.  So how long can even the most coordinated intervention hold the line?

Update: Typo fixed to clean up an inconsistency. Sorry for any confusion.