There is much hype about “currency wars” in the international media this week, reaching the heights of the Davos gathering. The excitement seems to have been started by Bundesbank president Jens Weidmann, who earlier this week aired his concerns about an apparent politicization of exchange rates owing to an erosion of central bank independence and rising political pressures for more aggressive monetary policies. Japan is the current focus of attention, as the deflation-worn nation is said to have kicked off a new round in the covert global battle for competitive advantage through currency manipulation by announcing a somewhat higher inflation target as well as new quantitative easing measures. In fact, the yen has depreciated markedly since last Fall against the U.S. dollar and even more so against the euro in anticipation of fresh policy moves by the Japanese authorities.
There is of course nothing new about sharp movements in the yen’s exchange rate. With zero interest rate policies in place for more than a decade, the yen for long won the popularity contest as carry-trade funding currency; with corresponding gyrations seen in winding versus unwinding phases in the global carry trade game. So the yen has appreciated strongly since the global crisis as the spectrum of funding currencies increased. Nor would it be the first time that the Japanese authorities have sought out deliberate measures designed to weaken the currency despite officially hosting a “floating” exchange rate determined “by market forces.” Long before the global crisis hit, Japan championed a version of quantitative easing that focused on FX reserve accumulation. The key difference is that other nations used to view such moves more benignly when times were still better at home. Today, with all key advanced economies still struggling to recover, and each of them hoping for relief through exports, zero tolerance and envy meet the nation that is seen as getting ahead in the common campaign for a competitive currency.
The euro appears to be the “victim” in all this. Paradoxically, as it may seem at first, while other currencies tend to weaken as their monetary authorities take on a more aggressive easing stance the euro has actually appreciated since Mario Draghi’s famous pledge to do “whatever it takes” to preserve the euro, promising—conditional—support for public debt of euro crisis countries. The ECB’s peculiar ways, its reluctance to be more forthcoming with monetary support, except when the euro seems to be on the verge of breakup, is being identified as the factor that might explain why the euro is the odd man out at the current juncture.
Yet, viewing the euro as the victim seems to be saying that the euro is more deserving of continued weakness than others, supposedly so as to foster and support the currency bloc’s recovery from crisis. Arguably, this would be somewhat akin to the more tolerant attitude towards Japan in this matter in pre-global crisis times. Yet, has this approach really helped Japan to recovery lastingly on the back of export-driven growth? Also, has it helped the world economy to contain global current account imbalances that were later identified as contributing causes behind the global crisis?continue reading…
Germany’s Federal Statistical Office released its first estimate of German GDP in 2012 at a press conference held in Wiesbaden yesterday: “German economy withstands the European economic crisis in 2012.” Reporting that growth slowed markedly in Germany last year, down to only 0.7 percent from 3 percent in 2011 and 4.2 percent in 2010, the international media seemed to pin the slump (the Office’s estimate assumes a contraction in GDP of 0.5 percent in the final quarter) on the euro crisis (FT.com: “Germany hit by debt crisis turbulence”; WSJ.com: “Euro crisis damps German growth”).
It is rather unsurprising that German exports have not been doing so well in the crisis-stricken countries of the euro area of late. Germany’s trade and current account surpluses with its euro partners have declined significantly. But so far the crisis has actually been a mixed blessing overall. For one thing, benefiting from its haven status, Germany’s interest rates and financing costs are extremely favorable. While lending support to property markets, finance minister Wolfgang Schäuble enjoyed a nice windfall too, as Germany’s general government budget ended the year with a small surplus, in part owing to savings on debt interest payments (much in contrast to his partners elsewhere in the area).
Below is the video from the latest session of the Modern Money and Public Purpose seminar at Columbia University, featuring Jan Kregel and Forbes‘ John Harvey. The session touched on the sustainability of fiscal and trade deficits, why economists need to study accounting, the risks of paying down the government debt, the real meaning of “fiscal responsibility,” and the assumptions about the appropriate size of government that are sowing confusion in the budget debate.
If it controlled its own currency, the usual thing for a country like Greece to do in these circumstances would be to devalue. Since it doesn’t control its own currency, Greece is being “asked” to pull off an internal devaluation, or as C. J. Polychroniou puts it:
Essentially, what they agreed to are additional measures that are specifically designed to reduce the standard of living for the majority of the working population as a means of improving the nation’s competitiveness. Aside from firing civil servants, the new memoranda are all about major private sector wage cuts and an overhaul of labor rights.
This is from Polychroniou’s newest one-pager, “The New European Economic Dogma,” released yesterday. Polychroniou takes on what he regards as the flawed ideology behind the policies that are being dumped on the Greek people; policies motivated by an ambiguous and, says Polychroniou, toxic conception of “competitiveness.”
“…while Europe’s leaders haven’t hit upon a way to forestall a years-long span of catastrophically high unemployment and falling living standards, they do appear to be really really really really committed to saving banks.” That’s Slate‘s Matthew Yglesias, who notes that this (seemingly exclusive) focus among European elites on saving their banks likely ends up protecting the US economy from eurozone contagion more effectively than would policies focused on growth and easing the plight of those whose wellbeing depends on the “real” economy.
The reason is that, as Gennaro Zezza points out here, the US economy is not overly exposed to a slowdown in European growth; not overly exposed, that is, compared to the fallout from a European financial panic. As Dimitri Papadimitriou and Randall Wray indicate, US finance is still entwined with the fate of European finance; at least in part due to the roughly $1.5 trillion invested in European banks by US money market mutual funds.
In other words, comparatively speaking, the US economy will not suffer much from European policy elites’ apparent relative disinterest toward the fate of their people, but may dodge a bullet if current efforts to save the European banking system work out. (At least in the short run. In the longer run, Ryan Avent is probably right to worry that this LTRO stuff may just amount to sweeping serious problems under the rug: “…when failure is never allowed the system becomes more brittle and the cost of a blow-up, which probably isn’t avoidable for ever, rises.”)
This post provides our latest update of the quarterly figures for the real and nominal GDP of U.S. trading partners (1970q1-2016q4), which were presented a few years ago in a Levy Institute working paper and have now been updated to the second quarter of 2011, with predictions up to 2016 based on the latest IMF World Economic Outlook.
The database has been requested over the years by other researchers, so we decided to put it up on our web site. It is, and will be, available here: http://www.levyinstitute.org/pubs/gdp_ustp.xls
Our index for the annual growth rate in the real GDP of U.S. trading partners, reproduced above, now shows that no boost in U.S. exports from accelerating growth in the rest of the world can be expected. More specifically, according to the IMF the eurozone will not contribute much to global growth, and if fiscal consolidation in Southern European countries will indeed be implemented, we expect a further slowdown in the area. Given that the eurozone accounts for roughly 16 percent of U.S. exports, the impact on the U.S. economy of a European slowdown, through trade, will not be dramatic — certainly not as dramatic as the potential negative impact on financial wealth if the eurozone sovereign debt crisis spirals out of control.
Some “gold bugs” advocate a return to the gold standard, which the United States officially abandoned in the early 1970s. The annual data in the chart above show that the price of gold has risen sharply in both euros and yen since 1999. Meanwhile, the dollar itself has fallen against both of the currencies, as shown by the lines near the bottom of the chart. Easy monetary policy has played a role in this drop. But a weakening currency has been one factor behind the recent increase in U.S. exports. The latter grew more than imports in percentage terms over the period shown in the figure. But nonetheless, both imports and exports grew by over 40 percent. It would have been difficult to increase exports at all with U.S. goods and services priced in a surging gold-backed currency.
It goes without saying that the price of gold could possibly fall rather than rise in coming years. But dealing with a commodity money whose value can abruptly change in ways that harm the economy is always a severe drawback of a currency backed by gold. Of course, if the United States had adopted a gold-backed currency in 1999, U.S. wages, prices, etc. would likely have behaved much differently than they did. Hence, one cannot be sure what the outcome of a switch to the gold standard would have been. But these other changes could also easily have been detrimental to the health of the U.S. and world economies.
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