View Full Version : Currency Wars Prove Decoupling Is a Myth

10-08-2010, 02:39 PM
Here is an article which may provide some additional perspective on the so called currency wars...

Currency Wars Prove Decoupling Is a Myth
by Rex Nutting
Friday, October 8, 2010

There's a depressing familiarity to the latest World Economic Outlook from the International Monetary Fund: The major economies of the world can still bring each other down too easily.

The rising risk of a full-blown currency war is just the most recent example of how interconnected the global economy remains. The Great Recession put an end to the notion that emerging economies had effectively decoupled from the advanced ones.

When the United States went down, so did the whole world. What happens in Detroit, Las Vegas, and New York is felt in Riga, Shanghai and Bangalore, not to mention London, Tokyo and Madrid.

As the crisis began to unfold in 2007, there was great hope at the IMF and among other deep thinkers that the world had finally decoupled; that when the U.S. sneezed, China wouldn't get a cold. The feeling was that China, India and the other great emerging economies could finally stand on their own, without relying on ever-increasing exports to the developed world.

That delusion was shattered in 2008 and 2009, when global trade collapsed in the wake of the credit contraction in the advanced economies. Countries that relied on exports for growth were knocked around.

The emerging economies have bounced back quicker and stronger than the richest economies have. They didn't have the financial imbalances or credit problems that we did, and they had learned a lesson from their own crisis in 1997 to keep their debts down and their foreign reserves high.

The U.S. dollar has depreciated sharply vs. other major currencies in the past few months.

While some look at the relative strength of the emerging economies compared with the advanced economies as proof that they have decoupled, that's a simplistic view.

The lesson of the 2008 crisis, is that while different economies can decouple temporarily, the gravitational pull they exert on each other means that the broader ups-and-downs of growth across the globe remain highly synchronized across borders.

Two years ago, global leaders meeting at the Group of 20 summit were able to agree on coordinated actions to prevent a global depression, largely because their short-term interests coincided. Monetary and fiscal policy was loosened nearly everywhere.

But now coordination is nearly impossible. Economies have different problems now, and so they need different policies, especially on the fiscal side. Some countries need tighter policies to prevent overheating; others still need stimulus. Some need to cut sovereign debt immediately; others have time before they must act.

The biggest force working against cooperation now is, ironically, in the one area where all countries want to do the same thing—increase exports.

The fastest way to goose your growth rate is to devalue your currency so you can sell more to your neighbors. That desire to increase exports is behind all the talk about a currency war.

Everyone sees a short-run advantage in a weaker currency, but not everyone can have a weak currency, someone has to be (relatively) strong. Not everyone can run an export-led economy, either. Someone has to buy.

The desire to devalue is creating all kinds of problems. Europe and the U.S. say China is keeping the yuan, also known as the renminbi, artificially weak to favor Chinese exporters. The House has passed legislation that would punish imports from China, and the Senate could approve the same measure after the election. U.S. Treasury Secretary Timothy Geithner heated up his rhetoric against Beijing, and so did the IMF.

Meanwhile, Europe worries that the euro is appreciating too much against the dollar, thus harming Europe's producers. The Japanese have intervened in currency markets and cut interest rates again in an effort to keep the yen from gaining too much strength.

All the policymakers have known for years what they need in the long-term to make the global economy more stable and prosperous: Balanced growth.

In practical terms, that means China (and the other exporting economies) need to save less and spend more domestically, while the U.S. (and other importing nations) need to save more and consume less. Chinese workers would benefit from higher standards of living, and American workers would benefit from having more jobs.

China needs to stop being the world's only factory, and the U.S. needs to stop being the world's only mall.

Getting to that place won't be easy, because it will take some short-term pain to achieve long-term gains. Who is willing to go first?

[I vote for Iraq to go first.]

http://finance.yahoo.com/banking-budgeting/article/110968/currency-wars-prove-decoupling-is-a-myth;_ylt=As1S7uyAU0GTmF.ZNn.OnTa7YWsA;_ylu=X3oDMT E2bzdvN24wBHBvcwMxMwRzZWMDdG9wU3RvcmllcwRzbGsDY3Vy cmVuY3l3YXJz?mod=bb&sec=topStories&pos=8&asset=&ccode=

10-08-2010, 03:02 PM
Thanks for the post KO15

That was an easy to understand explanation of a complex situation. The more of this sort of thing I read the better I understand the more complex.

Thanks again KO15