Americans are Full of %^&! on Exchange Rates

♠ Posted by Emmanuel in ,, at 10/07/2010 12:17:00 AM
Ooh, this makes me very, very mad. When it comes to the white man / forked tongue sweepstakes, America is well-nigh unbeatable. The United States has done nearly everything humanly possible to debauch its currency and expects others to gladly accept the consequences. Witness the following, and I will be very surprised if anyone faults these statements:
  1. The US government plays a large part in making the dollar unattractive by implementing near-zero interest rate policies, quantitative easing via clogging its central bank's balance sheet with toxic assets, running trillion dollar-plus deficits, and creating expectations that such practices will continue indefinitely and even expand given the remote prospects for sustained American recovery;
  2. Accordingly, the US couldn't care less about maintaining the value of the dollar, meaningless "strong dollar" statements here and there aside;
  3. Pleas to allow "market forces" to assert themselves are thus nothing more than an indirect way of saying "let the dollar go" as it would under normal circumstances.
Which brings me to US Treasury Secretary Geithner haranguing the so very many currency interventionists whose efforts pale in comparison with those of America. Alike before, the US is again keen on using international financial institutions to do its dirty work in chiding these "interventionists" prior to this weekend's World Bank / IMF meetings in DC:
Global institutions must persuade emerging nations such as China to let their currencies rise or risk a round of competitive depreciations that would endanger the world economy, U.S. Treasury Secretary Timothy Geithner said on Wednesday. Geithner, laying out the U.S. position ahead of this weekend's semi-annual meetings of the International Monetary Fund and World Bank, pressed the IMF to step up its efforts to make sure countries do not pursue beggar-thy-neighbor currency policies.

The United States has pressed for years for the IMF to toughen its surveillance of currency policies, including during the former George W. Bush administration when a senior U.S. Treasury official charged in 2006 the IMF was "asleep at the wheel" on its basic duty of preventing manipulation. "This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," Geithner said at the Brookings Institution, a Washington think tank.

He said the time was ripe to create a more-level currency playing field, given that rich nations were getting ready to cede some power to emerging economies at the IMF. "We think this is a moment where it's worthwhile making sure those reforms to governance ... are complemented by more effective ways for the IMF to play a greater role in helping change behavior on the exchange rate front," he said. "That's the basic deal on offer."

He told a questioner the Obama administration has ample backing for its efforts to get Beijing to move toward market-oriented exchange rates, which would make its exports more costly, but cautioned against expecting quick results. "China will be less likely to move to allow its currency to rise more rapidly if it is not confident other countries will move with it," Geithner said, in a clear reference to risks that others are becoming more willing to keep their currencies' value down as a policy to boost exports.

Geithner sounded a note of frustration that so many countries appeared willing to use currencies as a policy tool. "The main problem today is you have a set of emerging economies that both remain undervalued and are leaning heavily against appreciation," he said. "That's not a viable strategy for them, it's not a sustainable strategy for their trading partners, for the countries they compete with, and it's not good for the system as a whole."

Currencies have become a point of contention in recent weeks as the U.S. dollar, to which China links the yuan's value, has steadily fallen in anticipation of a further easing in U.S. monetary policy. This has sent investors into emerging markets in search of higher yields, driving those countries' currencies higher. Geithner said it will require coordinated action among trading partners to settle how to let markets determine currency values and warned the United States can't make the case alone.

"Don't look for a near-term quick fix on this," he said. "This is the central existential challenge of cooperation internationally and it will take a long period of time." Geithner refused to respond when asked directly whether some type of coordinated intervention was needed in currency markets, saying he would only answer the question if it was "useful" for him to do so.
In the same breath, though, Geithner hints at the source of many of these problems--American easy money policies:
He also said the United States is going to have to move cautiously in removing economic stimulus because growth is still relatively soft, signaling it will be reluctant to take major steps quickly to cut its debts or raise interest rates. "We believe the United States in particular needs to continue providing well-targeted support for the recovery in the near term even as we put in place plans to help ensure fiscal sustainability over the longer term," he said.

Geithner said that the problem of undervalued currencies was "inherently a multilateral problem" that would take a cooperative effort to solve in the form of an effective multilateral mechanism to push countries with big current account surpluses to abandon export-oriented policies. He suggested the IMF needed to be more forceful in surveillance of global currency practices and to push for "a cooperative rebalancing of policy" that would help sustain growth. "We'd like to see the IMF have more leverage, more capacity to make a difference in these things," Geithner said.
Here is what I have to say to Geithner: the rest of the world is simply responding to the underhanded tricks Americans implement on a regular basis. While others would have suffered this Yankee foolishness more gladly before, it's good to know that times have changed. At the end of the day, other countries are performing open market operations in reaction to the actions of certain others who have undertaken actions almost guaranteeing that the value of their currency is shot. Again, who's doing the most "intervening" here? While I do not wholeheartedly endorse such responses to American free money policies, I understand why others believe they are entitled to do so. In all honesty, I cannot blame them.

Additionally, it is improbable that developing countries would back mechanisms allowing US interests to be served at the IMF so blatantly. While any number of developing countries are probably not happy about the magnitude of Chinese currency intervention since they may perceive pressure to follow suit, they probably do understand that the same brush used to tar China when it attempts to massage exchange rates can also be used against them if they feel the need to do so. So no dice but more empty American double-talk on beefing up the IMF's surveillance functions.

We should take the lead of the students at Peking University who know how to make sense of these typical American shenanigans. Told that China's American holdings were safe, they simply laughed the jokester Geithner off the stage. Don't buy into this American buffoonery lest they make a joke out of you, too. You sir and your colleagues are the largest interventionists on this planet as the lengths you have gone to in driving down the value of your currency have no peer. To paraphrase a certain saying, no nation has ever helicopter-dropped its way to prosperity.