More Tensions on the Currency Front

A scan of various news stories shows obvious signs of continued jockeying on the currency front.

Bloomberg reports that the BRICs (at least according to Russia) aren’t at all receptive to US efforts to weaken currency controls. The US position, as presented by Timothy Geithner, is that undervalued currencies (meaning the renminbi) produce can produce inflation and asset bubbles. Hhhm, yet the US seems to be going about this in reverse order, trying to stoke asset values to stimulate spending, to produce inflation, and the officialdom seems not to care much if the value of the dollar is collateral damage.

Japan tried this game plan, to use asset inflation to create a wealth effect to increase consumption, in its bubble years. We know how that movie ended.

But the efforts of various countries to stoke their economies via loose monetary policies is fueling speculation rather than much in the way of real economic activity at home, and thus are also producing nasty cross currents and tensions. Per Bloomberg:

The BRIC countries are united in opposing U.S. efforts to weaken or eliminate mechanisms to control currency fluctuations, Russia’s Finance Ministry said.

Brazil, Russia, India and China will put up “strong resistance” to attempts to make a “harsh appraisal” of currency controls at the annual meeting of the International Monetary Fund and World Bank this week in Washington, Deputy Finance Minister Dmitry Pankin told reporters late yesterday.

The BRIC countries “have agreed on a position that exchange rates aren’t themselves a problem,” Pankin said. “Rather they are a consequence of deeper processes, such as tendencies to save, to invest, of the investment climate.”

China, the focus of pressure to let its currency appreciate, has suddenly backed off its typical belligerent tone. I suspect this is merely a stalling tactic, to get past the mid October date when the Treasury is under pressure from Congress to opine on whether China is a currency manipulator. And for good measure, it will probably try to look a tad more cooperative though the Congressional mid-terms, then revert to form. China has allowed its currency to rise a smidge more (a 2% appreciation since last June), which Geithner deemed to be insufficient. The IMF has also deemed it necessary to put a bit of pressure on China. Per the New York Times:

The head of the International Monetary Fund urged China on Thursday to allow its currency to rise in value, an attempt to keep a contentious issue between the United States and China from broadening into a bitter international dispute…

“The momentum is not vanishing, but decreasing, and that is a real threat, because everybody has to keep in mind this mantra that there is no domestic solution to a global crisis,” he said at a news conference as around 13,000 officials, executives and other participants gathered here for the annual meetings of the I.M.F. and the World Bank.

“Many are talking about a currency war,” Mr. Strauss-Kahn acknowledged, adding: “What we all want is the rebalancing of the global economy, and this rebalancing cannot happen” without “a natural consequence of it, which is a change in the relative value of currencies.”

While some analysts signaled they thought China could tolerate a rise of 5% to 8% a year, Prime Minister Wen had argued yesterday that the move would lead to too much domestic unemployment. But what about the unemployment in its trade partners? We are finally getting to the core issue: that a chronic trade surplus country exports both goods and unemployment.

Another sign of a wee (and perhaps short lived) climbdown by China was its sale of short-term Japanese investments. Hefty buying by China has pushed the yen to high levels which are particularly damaging to its economy (although given the long lead times in trade, it will take a while for the full effects to be felt). Fedwatcher Tim Duy had also argued that this was a clever way for Japan to do the dirty work of buying US dollars. Rather than have China accumulate dollars, proof of its manipulation of the dollar exchange rate, the new plan appeared to have been China buys yen, Japan sells yen to manage its value back down and buys dollars. However, this shift may be temporary; it may take time to discern what the Chinese posture really is.

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  1. OHOA

    This Bloomberg article is clearly part of the disinformation effort by the “chinese running dogs” (words of washington post today) in the US business and media communities. Russia does not speak for the “BRICs”. If he indeed made such comment, the Russian Official is a fool. It is also part of a pattern of Russian pique at no longer being a major player in the world, in fact Russia at best is a junior and reluctantly tolerated part of the BRICs. Regarding the response of the BRICs on the issue, the major jerk in this situation is China, whose response is predictable as Yves has documented many times. Brazil is pissed off in a big way, I mean 25% currency appreciation hurts. They are already talking about wars. India, too has had 6% appreciation and today the finance minister said that the global imbalances, the massive surpluses and reserve accumulations are unsustainable clearly pointing the finger at China. India is not going to take Chinese side against US and EU, as much as Russia and China might dream on.

    In short the article is part of a disinformation and “headfake” campaign (I like that description!) that chinese and their stoolies launch as soon as matter heats up.

    Incidentally, the attacks on this website were probably because Yves has put forth a few Anti-chinese articles this week. It happenes regularly to websites when they say anything anti-chinese. Suddenly, the sites are deemed unsafe, difficult to load because of high traffic and so on. Part of unsavoury repressive methods. Do it often enough and there is change in behavior with websites refusing to touch anti-chinese material. In the old days chinese violently attacked any journalist saying anything critical of them as a “whore”. There were also other measures making such people persona non-grata. Sooner or later journalists stopped commenting. These days they are more subtle. There is probably a department for this in the chinese state apparatus.

    1. alex

      I suspect, or at least hope, you’re right about Russian bluster. For all that we have the cute acronym BRIC to describe the group, in many ways they have little in common. India has rightly complained about Chinese currency manipulation, and both Brazil and India (judging by its trade deficit) have overvalued currencies. If anything Brazil and India are our natural allies in complaining about China. Allies, what a concept! Wonder if Obama or Turbo Timmy have ever heard of it?

      1. Indigenous Centurion

        Turbo Timmy

        Did Turbo Timmy addresses our international competitors, “We upped our currency; now up yours!”?

    2. colin

      Aha, anyone who tries to understand and rationalize the chinese actions and their perspective is automatically an arm of of the CCP, right?

      1. Robert Dudek

        Russia is and will remain a major player. It has more natural resources than any other country and because resource scarcity will be THE major theme of this century, Russia will carry a lot of weight.

  2. eh

    It’s only the beginning.

    In one sense you have to admire the Chinese, who seem willing to unapologetically do what they see as best for their own country, essentially saying ‘fu’ to the rest of the world.

    In contrast, the US and US corporations have been selling out US workers for decades by running big, unsustainable deficits and moving jobs to China (elsewhere as well).

    1. psychohistorian

      But of course it is in the interests of America to pretend its economic perfidy doesn’t exist. Since the American media never talks about our imperialistic ways, the results of our economic policies effect on the global economy are misrepresented. The canard that they just hate our freedoms is just so much BS when what is is that they hate is our raping of the worlds’ resources and its people to line the pockets of the world’s uber rich.

    2. Kevin de Bruxelles

      In one sentence, Reinhold Neibuhr sums up the fallacy backing idealistic fantasies like globablization. He claims that these utopia’s “rest upon the possibility of developing a degree of disinterestedness among men [and women!] of power which the entire history of mankind proves them incapable of acquiring”.

      So I agree that China are doing nothing more than looking out for their best interests. All countries should be doing the same instead of dreaming that some altruistic global order will arise from the fairy dust of best intentions and group economic self-interest will just dissolve away.. But there are limits to power grabs and China must always balance any potential gains with the dangers of the reaction caused by waking the slumbering giant.

      The only way a true global order will ever come about, if the history of the state is any guide, will be voluntarily from below, but only after several failed attempts to impose a truly global order violently from above – of which I would argue we are now currently seeing the first attempt by the United States.

      But this realist concept of power obviously works on the various social classes within a nation as well. And just as we can say the US as a whole has been negligent in protecting its national economic interests against the Chinese, the people of America have been equally passive in protecting their interests against those of the Few. The people of America have been been lulled into an idealist dreamworld where they look upward and outward for saviours on the horizon. But there is no help on the way. The Few will keep taking, keep executing their newly found “droit de seigneur” on the backsides of the American people, until that day the slumbering giant finally wakes up.

    3. ac

      You must’t forget to admire the US In one sense who seem willing to unapologetically do what they see as best for their own country, essentially saying ‘fu’ to the rest of the world…by having close to a thousand military bases, ac fleets in all oceans and seas, invading countries when deemed necessary to protect its own interests…

  3. John

    25% appreciation of the RMB vs the USD since 2005.

    What has happened to the job market in this time?

    What has happened to commodity (oil) prices?

  4. liberal

    John wrote, 25% appreciation of the RMB vs the USD since 2005.

    ISTR there’s an argument about the real value of the RMB which makes the fact you cite less compelling.

  5. KN

    Yves, I admire your ability of catching information so fast. As you quote, China sold a net ¥2.0182 trillion worth of Japanese bonds only in August. But China bought a net \2.3159 trillion in January to July this year. So, I guess China’s holding of Japanese bonds is not so huge right now. The problem is that yen appreciated and Japan’s bond markets climbed in August despite massive selling of Japanese bonds by China. Of course, China may have held it as cash without reinvesting in anything. My question is: Who is (or was) buying yen? Is it China which drove yen higher?

    Today (I mean 8th, October), China’s yuan reached at the new high, and the US dollar rose to the highest against Japan’s yen in 15 years. Of course, China’s intention to appreciate yuan is to evade criticism at the G7 on its currency policy. It’s easy to understand, but how about yen? Is China buying yen to lose Japan’s face at the G7? How to handle yen may cause discord among nations.

    1. ac

      I think China should count itself lucky to avoid potential accusations that Yen is higher because of a Chinese plot. Good try.

  6. zjin

    Tim Duy got to be kidding. What good does China’s forcing Japan buying USD to do for China itself? It has impact on USDJPY, but no impact on USDCNY, right?

    And regarding unemployment, does anyone seriously believe that the job loss in China can be transferred to the US? I see job gains in other developing countries as a result. It is so obvious that I thought there is no need to repeat this argument.

  7. i on the ball patriot

    The real problem is that the global wealthy ruling elite are forestalling a needed global debt jubilation by using ‘Mr. Global Propaganda’ instead. ‘Mr. Global Propaganda’, owned and controlled by the global wealthy elite, has now carried us well beyond the ‘normal’ jubilation cycle.

    The world is now in debt up to its ass to the global elite’s central bankers who should have had their balls cut off a long time back when they shifted from profit driven Vanilla Greed to control driven Pernicious Greed. The shift to control driven Pernicious Greed was made because of their piss poor prior Vanilla Greed policies that put the planet in overdrive and into the unsustainability zone. The seas now fill with oil, the rivers run red, and Lady Gaga parades around in a raw meat dress. Sheeesh!

    They really don’t want to reflate the global economy as most believe. They want to deflate the global economy to eliminate people — yes its a herd thinning — and cut back global consumption. Instilling the perpetual conflict in the masses is not working as well and as rapidly as they had planned (where the masses eliminate each other through intentionally created divide and eliminate schemes) and so they now put Mr. Global Propaganda to work stirring the global hate and war pot. It is only a short time before something pops on some catchy calendar date like 10/10/10.

    Think about it. If they did want to reflate they could do that easily. They are masters of the bubble and creating a new one would be a piece of cake, especially as they now have the global masses so cowed and dumbed down to a gullibility level of minus one.

    For instance, If they did want to reflate the global economy they could easily do so with a moon bubble.

    It would be a simple matter of colonizing the moon, give it nation state status and its own currency called the Moonbi. They could then sell land to speculators, create rumors of a central gold vein on the moon, and use the Moonbi to prop up the — getting more worthless each day — dirty dollar by buying treasuries. This would take the pressure off of Japan and China. People love the moon, and given that they are fast approaching the dumber than shit stage through ingesting so much mindless media, selling Moonbis and Moon related products would be like taking candy from a baby. Sure there would be some baby’s crying when they realize that they have been conned and royally screwed, but they could be squelched, demonized, and dealt with, by then having Mr. Global Propaganda re-brand the Moon as a terrorist harboring state by simply rerunning the old now very standard propaganda lines …

    The Moon is evil!

    The Moon is stealing our jobs!

    The Moon has said it will destroy us!

    The Moon is an unchristian heathen!

    The Moon is an enemy combatant!

    It is OK to torture the Moon!

    The Moon abuses its children!

    The Moon is infiltrating congress!

    The Moon is a commie and hates Ronald Reagan.

    So it would be easy to create a new bubble, they just don’t want to do it.

    The REAL solution is to do what should have been done when the world shifted from profit driven Vanilla Greed into control driven Pernicious Greed. Neuter the global wealthy ruling elite.

    Deception is the strongest political force on the planet.

    1. tawal

      I think the oligarchs should just hire the proles to create facebook friends for them. He who dies with the most facebook friends is the most beloved.

  8. sherparick

    I guess it is a compliment to this web site that the Chinese Secret Services give it the attention to disrupt it.

    By buying Yen to force the Japanese to buy dollars, the Chinese indirectly have Japan sustain the Renminbi’s peg against the dollar, while at the same time diversifying, and somewhat lowering its the Chinese Central Bank’s risk (approaching certainty) of losses on its dollar holdings and the dollar depreciates.

    For the last 15 years the leading U.S. multi-nationals have invested heavily in China with the business model of making it cheap in China and selling it dear in the U.S. A 30% devaluation of the dollar v. the Renminbi/Yuan really hurts this business model. Also, the flow of capital from China back the U.S. resulting from 1/4 trillion dollar trade deficits, much like the almost equally large flow of capital back from the oil producing nations, is another major revenue source for Wall Street banks and hedge funds. A diminishment of this capital flow hurts one of Wall Street’s biggest revenue streams. This money interest in the status quo of huge U.S. trade deficits and dependence on foreign oil is probably the biggest reason these deficits continue despite the long term damage to the country.

    Both groups will print stories through sympathetic journalists and outlets about the “danger” of trade war with China and the benefits of free trade.

    As for those benefits, absent a general devaluation, the only way for U.S. manufacturers and farmers to regain competitive equality is through a decline in real wages, incomes, and living standards. This is what happen during the last 10 years and it appears to be accelerating for the next 10 years.

  9. F. Beard

    It’s odd that countries wish to destroy the purchasing power of their currencies. And isn’t that something that would occur anyway due to economic forces if a nation continued to have a trade deficit? And how about using a strong currency to buy capital equipment to increase a countries competitive advantage? And who profits as central banks engage in competitive currency debasement? And will a lot of that new money end up driving up the price of food to starve the poor?

  10. Allen C

    Posturing for BW III

    The fundamental imbalances must be addressed. The US has to face the realities of its own actions. The US has an advanced system in place to take advantage of the lower offshore cost structures. The US leadership let it occur due to incompetence and/or corruption. Period.

    This has resulted in a long-term loss of manufacturing capability. American ingenuity was unable to fill the gap with higher value goods and services. Incompetence and corruption in financial services and the auto industry exacerbated the situation. The US is left with massive debt an a relative inability to close the gap. Let’s not forget the massive bonuses realized for the cost reduction!

    Americans need to kick the rot to the curb. The consequences of failure must regain standing.

    The US ultimately has the economic Armageddon card going into BW III negotiations. Evidence of progress is when we see the US and others own up to their own failures rather than simply calling China a currency manipulator.

  11. purple

    The adoption of neo-liberalism guaranteed an outcome of insufficient global aggregate demand. It was based on the premise of cannibalizing past social gains, particularly in the Western working class. Sorry, there is no more ‘fat to cut’. This is why everyone is trying to export their way to wealth through other countries markets.

  12. MyLessThanPrimeBeef

    Why not just add a few zeroes to everyone’s money, making all of us feel richer and wanting to spend more?

    That seems to be the easist way.

    1. alex

      Every cloud has a silver lining. In the case of hyper-inflation, it gives children a motivation to learn scientific notation.

      Kid: Joey got 10^17 dollars to buy an ice cream and Bobby got 10^17 dollars, why can’t I get 10^17 dollars?

      Mom: Well ok, since you did so well on your math homework.

  13. FundMental Transformation

    I’m not an economist, and this won’t make sense to everyone, or even be realistic. [Sorry if too ‘esoteric’ without links. Nothing, really to cite. Just a long-term, contextual perspective.]

    My suggestion, if I had a voice in this would be: For China to ‘cure’ it’s WW2 debt – finally or incrementally – to the west. That would rebalance the ‘books’ to a more realistic level where a workable solution can come from. From that ‘new normal’ we could see more clearly what’s next. With it remaining as an ‘uncertain given’ at T1 … it’s hard to know how to act until the timing/reality is confirmed. Many have doubts it will ever occur.

    This predicament seems to have been aided by a flawed assumption(and/or intentional deception)that those funds would somehow on their own be cured by now just through the natural course of things, or something. [The invisible hand maybe?]

    [There is a need for supervision because rehypothecation without express permission [aka misusing collateral] has become commonplace in the stratospheric banking realm, just like, apparently, forging notariztions has in the MBS realm.]

    ‘Justice’ needs to happen first in the current financial system before the door’s will even open for the next step, I think . And that won’t even begin to happen until the ‘people’ see it with their own eyes. Fortunately/unfortunately it has begun to reach that stage. Both awareness-wise [see foreclosure-gate + Yves] and other-wise [mum’s the word].

    Not everyone wants organized change. Some people like the ‘freedom’ of “catch as catch can”. So they wait to see what happens, like a lion waiting, waiting for a lamb.

    Now here’s the rub, there is nothing we can do about that. That is up to diplomacy. Which I had hoped would have picked up more momentum by now. Apparently, meh. Maybe we could encourage our congress-critters to engage diplomatically with China in this, rather that tossing meaningless bluster sure to delay the actual process further. Perhaps that’s too much to ask.

    To quote a famous rapper – “This shit’s messed up.”

  14. pebird

    Capital inflows moving into China just waiting for the RMB to appreciate.

    China still accumulating dollars via trade surplus – the US wants China to appreciate – e.g., willingly take a 20% to 40% haircut on their accumulated Treasuries plus force their export industries to reduce income by raising prices.

    The US is engaged in quantitative easing (how many trillion, who really knows) to drive down interest rates over the entire yield curve. We’ve had QE 1.0 and 2.0 coming up.

    And China is accused of manipulating its currency.


    1. ac

      The truth is US want to manipulate it’s currency lower by creating thrillions of extra dollars. But this modus operandi of US failed to some extent due to some dollar peg currencies like the yuan. Instead openly admitting that US wants to manipulate it’s currency lower, it is accusing others of keeping their currencies artificially low. Excuse me, other currencies are artificially low because US print excessive fiat dollar and demand others to accommodate.

      1. brazza

        That is sacrosanct. Each time Geithner gets on his soap box about how everyone should avoid depreciation a outrance, I have trouble holding down my breakfast. He doesn’t even bother to hide his hypocrisy … its shameless.

      2. alex

        ac: “other currencies are artificially low because US print excessive fiat dollar”

        Are you a China apologist or a parody of one? China could always raise its peg to avoid having its currency excessively devalued by excessive prining of USD. Gosh, I wonder why it doesn’t do that.

        1. brazza

          that isn’t the point. China doesn’t bitch about it .. the US sanctimoniously does. All the while breaking its own rules blatantly. THERE IS NO EXCEPTIONALISM except in US heads.

          1. whoami

            ” China doesn’t bitch about it .. the US sanctimoniously does. ”

            Precisely! The rest of the world (and btw, more than UK and some countries in Europe) see current US behaviour as that of big whiny babies. Sad. We need to grow up, work harder and smarter and stop blaming others for problems.

            Note the incoherence of the arguments:
            *If remninbi is undervalued, we are getting a good deal that we should use to build up industries of the future that we can actually sell (e.g., environmental rather than defence);
            *what exactly would we be able to sell if remninbi were lowered by (8%)?? they would luv to buy our military stuff (which is what we mostly build), but we can’t.
            *not to mention the crucial the chinese manufacturing is playing for leading tech industries (Intel, Apple etc)

            And why can’t we place equivalent tarrifs/subsidies in a subtle manner that neutralizes any such advantage (as if WTO disapporoval ever prevented us from doing anything)??

            Because really it is all a diversion. The hedge funds and the like want to have unfettered access to Chinese financial markets so they can wreak havoc and make money via deceptive practises and speculation. They will not allow that, because they know it adds zero value and can (and will) cause immense harm–that is how they money!

            Ultimately we should aim for a more “socialisitc” society (like Germany) and actually plan for the future years down the road. But those are dirty words that goes against the “neoliberalism”. And hard work. Instead misdirect people (blame china!) or use the “veal pen”.

          2. IwantMy Mommy

            This is the basic:

            1. United states is essentially a postwar nation. All of its essential trade, data, policy and governing institutions are formed after WWII. That is why US perception that it owns the world, that it still thinks 16% of dollar economy equal to 1950 when US rules 40% of global output. In short US is too small to throw its weight around like it used to be. It’s a novel experience, specially for international relationship, when countries can ignore US, retaliate and hit where it hurts. United states think it’s the king of the hill, ruler of unipolar world, when everybody think temporary 80 yrs power vacuum from WWII, was mildly amusing and now time to move on.

            2. A lot of treaty (free trade, IP) are written under the assumption that US will maintain status quo, owns stuff and able to impose will. Unfortunately, by now, other people has the cash, owns patent, manufacturing line and control the market. Those treaties now come back and bind US.

            3. Then there is china. US can’t get uppity and scream “freedom”, “commie”, “free trade”, because US was one of the imperialist bastards who put china in colonialism bondage. US signature was all over documents that history notes causes suffering.

            Treaty of Wanghia 1844
            Treaty of Tientsin 1858
            Boxer Protocol 1901

            4. Cold war and now bunch of mental midgets like Obama running around like he knows how the world operate. Sending aircraft carrier of the coast of china. (yeah well, gun boat diplomacy? really?)

            5. All US big talk about austerity, free market capitalism, neoliberalism in the 80’s-90’s-00’s, rule of laws, etc. are just empty talk.

            All in all, for a country with no cash, everybody suddenly founds, US talks too much, whines a lot and acting too big for its size. Old empires and established powers suddenly exert powers and show how power and wealth were played in Eurasia.

            Even taliban out politics the US in eurasian court.

        2. ac

          I think China is being smart here by marrying Yuan to US dollars, knowing that US is the creator and strongest player in the global fiat currency and economic play yards. This marriage will ensure Yuan and US dollars swim and sink together…it not only guards against US trickeries but also any other speculators who need to face up the might of the two countries should they comtemplate any adventure against Yuan. US is trying very hard to shake the Yuan off as it bogs down US actions be it fair or unfair ones.

  15. ac

    According to Econbrowser

    “…the percentage appreciation in the yuan that has taken place since mid-2005 (in log terms, of course). The yuan is now therefore about 21% (24%) stronger against the dollar in nominal terms, and 20% stronger in trade weighted real terms as of August, as compared to June 2005….”

    So far only Econbrowser gave the most professional estimate on the value of Renminbi(as compared to PK’s back-of-the-evelope estimate based on which he agitates for confrontation with China). If Econbrowser’s estimate is right that Renminbi value has indeed appreciated by around 20% since 2005, where are the positives for US? Please do not tell me maybe Renminbi is undervalued by 80% or 90% vs the US dollar therefore China must do the necessary.

  16. ac

    This is getting more complicated…one could argue that many countries have trade surplus because they dig stuff from underneath their grounds. US has trade deficits not only because its products are not cheap but also because it did not dig enough things like oil, rare earth materials from US ground which US has in substantial amount. The US is to be blamed for this. China dig alot from its ground to export such as rare earth(may be China should ban this so that trade with US could be balanced)

    1. alex

      “US has trade deficits not only because its products are not cheap but also because it did not dig enough things like oil, rare earth materials from US ground which US has in substantial amount.”

      What China really needs is better apologists. This is embarrassing. Ever hear of a country that had a trade surplus despite have a deficit in minerals trade, like oh say Germany or (except for quite recently) Japan?

      “rare earth(may be China should ban this so that trade with US could be balanced)”

      Yes, please take a foolish action like banning rare earth exports so it will be clear to the world what an unreliable trade partner China is.

      1. Skippy

        Please define the time line in your “unreliable trade partner” paradigm. Historically the US has done some very very bad things…eh. But now that someone has said_to its face_”no mas” its unreliable.

        In fact, it is very interesting to see how America acts when it receives a dose of it own medicine. All I can see is it crying like a spoilt brat, deflecting from its own failed policies, mommy I had no part of it, it was all their fault….shezzz

      2. ac

        “Yes, please take a foolish action like banning rare earth exports so it will be clear to the world what an unreliable trade partner China is.”

        China could easily retort:”We sell you rare earth so you could make the high tech stuff like F-22, F-35, weapon systems…only to be told you ain’t selling any of those to us. This shows how unreliable a trade partner you are…”

  17. Anon469

    [quote]Japan sells yen to manage its value back down[/quote]

    Somebody tell me Japan isn’t manipulating her currency

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