Currency tension will continue despite Geithner’s diplomacy
This was my latest media appearance from last Friday. I spoke to Howard Green about the G-20 summit in Seoul with David Weidner of Market Watch.
You can see some of my pre-meeting comments here. While I thought US Treasury Secretary Geithner’s letter to the G-20 was good diplomatically, I didn’t think Geithner would get far with his plan because it’s just not ain anyone’s interest. Moreover, the economics behind it was very muddled as Marshall has pointed out.
Subsequent to the G-20, I would say my original expectation was about right. It wasn’t a complete waste of time as David Blanchflower says. But, not much was accomplished. In fact, the ‘currency wars’ continue apace with US TIPS now yielding negative rates and Mexico entering into the fray (see here). I would also point out that South Korea is making noises about yet more capital controls. So, you can consider the meeting a bust.
That’s it. Here’ the video.
(click picture for the video)
There will be a beggar thy neighbour policy in respect to currency valuations. China is deliberately holding the value of the yuan down to a level that maintains exports. It uses its cash piles to invest elsewhere to increase the values of those currencies.
The US QE2 program is hoping to manipulate rates but it does have the benefit of lowering the currency as well. Competitive devaluations are the first stage of the next crisis. After that countries might be forced to impose capital controls. This will stop its currency rising out of control. Longer term though capital controls might stop hot money bidding up assets in one country only to have a devastating effect when they leave. Capital controls are preferable to protectionism.
David, I can’t disagree with anything you said. The part about capital controls being preferable to protectionism is where I am as well. But will these controls work? There is a lot of reason to doubt that they can.
I like the idea of imposing taxes on currency inflows.
I think that they will. If it meant profits could not be repatriated, it would mean that companies would need to look at where they manufacture. I am not an expert, but if they were drafted well it could mean that American companies might actually repatriate manufacturing plants. This would create well paid manufacturing jobs for the country, lowering unemployment. Manufacturing jobs are very good in that they create a lot of support jobs. By restricting the repatriation of profits to the same level as corporation taxes paid would mean that those companies that hide in tax havens would not be able to repatriate their profits. Tax evasion would be very much against the company’s interest.
This would reduce the trade deficits, it might actually increase exports for deficit countries as well, Though I fully suspect that even if it acted as an import substitute its impact would be beneficial. China would have to find a way to increase its domestic demand to absorb China’s surplus production. This would be preferential to any protectionism. It would stop China using its surpluses from boosting the dollar and maintaining its competitive advantage. That is a lot better than a tit for tat trade war.