World needs to stay vigilant about active depreciation of the dollar

Discussion in 'Wall St. News' started by ASusilovic, Oct 16, 2010.

  1. A currency war is spreading as the dollar's value against major world currencies has continued to decline in recent days. Some developed countries have begun to intervene in their exchange rates. The recovery of the global economy will suffer a negative impact if this trend is not checked.

    It is the dollar that triggered the currency war. Seemingly a market move, the depreciation of the dollar is actually active.

    The U.S. Federal Reserve's statement that it might restart quantitative easing — a policy central banks use to increase money supply — triggered the depreciation of the dollar. The dollar's value against the basket of currencies has decreased by 7 percent since the U.S. Federal Reserve began talk of possible quantitative easing.

    The move nominally aims to further drive down the interest rate in America to prevent the occurrence of a double dip. But it will affect the value of the dollar too, prompting the dollar's devaluation. In light of the history low short-term interest rates in the United States, a further decrease in the interest rate will drive the flow of short-term capital toward markets of emerging economies, quickening the appreciation of their currencies.
    Second, the U.S. government's strategy to double its exports within five years needs the considerable depression of the dollar. For America, boosting exports is a must in the post crisis era, because it cannot pin its hope for economic growth on the prosperity of its real estate market and consumption based on borrowing money.

    Obviously boosting exports relying on the competitiveness of U.S. companies is not realistic in the short term. Nor is it possible to be realized by the strong demand of its trade partners. None of America's trade partners — except those emerging economies — are able to achieve growth independently. Judging from the course of history after World War II, considerable depreciation of the dollar is the sole possible option that enables America to realize the goal. In this sense, driving down the value of the dollar has become an important choice in policy for the United States to recover the sluggish economy..

    The last but the most important point is that in the long run the considerable depreciation of the dollar will help America to transfer its debts to others. If we say the international financial crisis nationalized the private debts, then in the post-crisis era, the United State sees an urgent need to internationalize its debts.

    A great amount of bad debts of American financial institutions have been converted to government debt through government aid measures. In 2009, America's fiscal deficit stood at 1.42 trillion dollars, 3.1 times the 2008 level. The deficit ratio surged from 3.2 percent in 2008 to 10 percent to a new high since World War II. The debt of the federal government increased to 6.7 trillion dollars, representing 47.2 percent of its GDP. In 2010, the fiscal deficit is expected to be around 1.32 trillion dollars. How America retains economic growth while reducing the deficit is a big problem for the country.

    Historic experiences show debt-to-GDP ratio is not directly linked with economic growth and inflation (even devaluation) in most countries. But the United States is an exception because the dollar serves as the world currency. For instance, the ratio decreased from 121.2 percent in 1946 to 31.7 percent in 1974. Of that number, inflation accounted 52.6 percentage points, economic growth contributed nearly 56 percentage points and federal surplus contributed negative 21.51 percentage points. Even if the United States denies its motives to transfer their debts, it will unavoidably happen in reality.

    Given a sluggish economy and huge amount of debts, driving the value of the dollar down is in line with America’s interests, both in short term and in long term. The international community ought to stay vigilant about the strong motive for active devaluation under the guise of a market-based move.

    By Li Xiangyang, Head of the Asia department at the Chinese Academy of Social Sciences, translated by People's Daily Online
  2. Sounds good. Time to label them a currency manipulator and take action against their imports, since according to them they're not worrying about it anyway.
  3. Great Article. It's a chuckle to think that the international community can have any more influence on the US $ than the current US legislation can on influencing Yuan rates. Neither the US nor China will win a trade war. The $/Yuan rates are easy to align. All that is needed is for China to start dumping all the US paper it holds. The Chinese know that in doing so they lose the ability to sell into US markets. Trade flows and Investment Flows are the biggest impacts to currency relationships. Eco 101 teaches us that bilaterally they are opposite sides of the same coin.

    The FED needs to wake up and smell the coffee here and pursue a more intelligent path beyond bailing out the chronic moral hazard of the banking system. Saving the banking system was the right thing to do. More and more FED policy seems like pandering to the well heeled and their political party of choice.

    The one constant in economic history seems to be that governments wind up inflating away debts they can't pay, for things they shouldn't have done in the first place.

    Globalization seems to have given the US: A burst dot com economy; a burst housing bubble; a blown up banking system; two off balance sheet wars. Lots of damage that needs to be inflated away.

    I'm not a fan of Lester Thurow's brand of pop economics, but it seems he gets points for painting a picture of where globalization has always been headed (The Future of Capitalism). Factor price equalization is eating our lunch. As always, the politicians are experts at looking for external causes. It's the best deflector of criticism for their own handiwork.

    The Chinese make a nice padded target. They are as guilty as any astute ascendant economy of managing their currency. After all, if the Asian contagion didn't teach anything else, it taught the value of managing exchange rates and capital flows. Countries that fail to do this lose competitive advantage.

    Is hyperinflation the cure? Ask Brazil. Given the fact that all markets tend to move to extremes is this where the current $ devaluation trend is headed? Lets hope not.

    Lets hope cooler heads, common sense, and political compromise can prevail inside the beltway for a change. The world is growing tired of sound bite politics and the defective reasoning that supports it.

    Using Lester's terminology - The real fault line for the US has been the striking divergence between the financial interests of American wealth from the sovereign interests of the American nation over the last 25 years. Of course, that subject is too verboten to make it into print in the bought and paid for financial press.
  4. Is this is joke, seriously. End the Fed. They are engineering this. There I made it simple. On a happier note I heard that the Fed charter is expiring in 2013 and needs renewal.
  5. As I live in the US, rather than China, I'm rooting for the Fed.
    Not that it matters. As Martin Wolf points out, America is going to win the global currency battle:

  6. Andrew Jackson For President, 2012!!
  7. Yes. Did you see Tancredo is gaining ground?
  8. Nice article - I'm with ya - I live here too. I guess the politicization of this issue is a bit hard to fathom. Dudleys Oct. 1st Speech The financial "rocket scientists" created the current mess at the behest of FED's core constituency. It's hard to believe that this will end well. Clearly the die has been cast at this point. Dudley rightly identifies the risk being how the FED will exit the current policy. This is where things are likely to unravel.

    (Sorry about the multiple edits on this post - learning how to post graphs on ET)
  9. Here are the Graphs from the FT article: