Thursday, October 7, 2010

Competitive Non Appreciation?

It has been two months since i last posted something on exchange rate stuff...but off late things are heating up across the Central Banks about related to currency.Almost all the developed economies are struggling to reduce the unemployment rate and trying hard to increase there GDP rate.

 They attribute much of current exchange rate stress is emergence of china and its willingness to peg Yuan to American dollar at a undervalued value. Which is giving unfair advantage to Chinese producers to export more out of china and making other countries suffer job loss and loss of export competitiveness 
Two years ago, the world economy was in the grip of an economic crisis on a scale not seen since the Great Depression.The United States and its partners in other leading economies, in an unprecedented feat of peacetime economic cooperation, joined forces to launch a powerful, dramatic response.    
Together, we put in place a powerful program of financial support – classic fiscal measures of tax cuts and investment, combined with monetary policy actions by central banks, and a variety of creative actions to stabilize our financial systems – to bring the global economy out of freefall and on a path to growth. 
We mobilized hundreds of billions of dollars in financial support for and through the international financial institutions for investments in emerging and developing economies.We committed to keep markets open to trade and investment, and together we honored that commitment in the face of strong political pressure.
We passed sweeping reforms of the U.S. financial system, and the world's central banks and supervisors reached agreement just two weeks ago on a very tough set of global standards for capital to limit leverage in the major global financial institutions. 
He is talking about Basel III norms which got finalized some time back and here is the link of my previous post to understanding-basel-iii-accord

These decisions required considerable trust and political resolve.  And they have been effective in restarting economic growth and stabilizing financial markets.  Global trade is now almost back to pre-crisis levels.
Look at the Baltic Dry index over which tracks the movement of ships in Sea which is pseudo indicator for economic activity or trade happening and clearly its not up to the levels of pre-crisis 
Each of our economies is stronger today than would otherwise have been possible, because of the effectiveness of this joint strategy. And the financial reforms now underway will substantially reduce the risk of damage from future financial crises.
Financial reforms which they made are just delaying the crisis and passing it on to future. Reforms in fact made money into pockets of rich and as long as Global imbalances are there we can expect another crisis any time from now :)

The Growth Challenge
What are the main challenges ahead?

The most important policy question we confront together is how to strengthen the pace of growth and repair, and how to do so in a way that provides the basis for a more balanced and therefore more sustainable global economic recovery.
I guess he is talking about the employment growth which is not happening in US can be seen in the latest ADP report  which says The decline in private employment in September confirms a pause in the economic recovery already evident in other data. 
And that is what is worrying economists across the globe as they think this is period is growth led recovery with no improvement in unemployment. Which is very dangerous and crisis may be back with a bang if this continues  
This is not a challenge that is best resolved by nations acting independently.  In the heat of the crisis, we all recognized that our actions would be more powerful if we acted together.  Even though the most dangerous part of the crisis is behind us, we are still in a place where we can achieve better overall growth outcomes if we make policy in a cooperative framework.

 a few suggestions on the policy challenges ahead in three areas: growth, exchange rate cooperation, and reform of the architecture of economic cooperation.

First, on economic growth.  The IMF forecasts the world economy will grow at a respectable annual rate of around four percent in 2011.  Growth is very strong in many of the major emerging economies.  In the major advanced economies, however, output and employment are still substantially below the pre-crisis levels, and the pace of recovery has been slower, with economic growth now running at a pace that is close to potential growth rates and not rapid enough to repair quickly the substantial economic damage remaining from the crisis.

Economic recoveries that follow financial crises are typically slower than those that follow other types of recessions.  This is because of the headwinds to growth that are generated by the necessary adjustments in asset prices and in reducing financial leverage.  As financial institutions rebuild their balance sheets and households reduce debt and raise savings, spending is slower to recover.  Firms, cautious after being burned by the financial panic, are less willing to invest and to hire because of uncertainty about future strength in demand for their products.  

The greatest risk to the world economy today is that the largest economies underachieve on growth.  We need 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.

And for the recovery to be sustainable, there must also be a change in the pattern of global growth.  For too long, many countries oriented their economies toward producing for export rather than consuming at home, counting on the United States to import many more of their goods and services than they bought of ours.
From here on he started talking indirectly about China and other developing countries 
The United States will do its part to achieve this adjustment.  Private savings have increased significantly, and, as the recovery strengthens, we will bring down our fiscal deficits to a sustainable level.

But as America saves more, countries overly reliant on exports to us for their own growth will need to change their policies, or else global growth will slow and all of us will be worse off.  Countries that chronically run large surpluses need to undertake policies that will boost their domestic demand.
I guess he is specifically talking about Chinese policy of keeping Yuan undervaluation and there by giving added advantage of Chinese exporters. How can too much export oriented markers like china ,japan increase domestic demand? I only knew of one thing which is lower taxes and there by keeping more money in public pocket and asking them to spend . Other than that anything else? no idea for now
That brings me to the second policy challenge: we believe it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate systems.  This is particularly important for those countries whose currencies are significantly undervalued.
Like China which is pegging its yuan to dollar at a fixed rate from 2004 and here is the previous post related to it  basket-band-and-crawl-(BBC)
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.
Yes looks like when China can do this why cant i do (JAPAN). Japan recently made jump into the bandwagon of group which is depreciating there currencies there by giving advantage to there export oriented companies. This is one kind of protectionist measures which are illegal according to WTO conventios

This sets off a damaging dynamic, described first by my former colleague Ted Truman, as "competitive non appreciation." Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies. The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports.

This is a multilateral problem.  It is unfair to countries that were already running more flexible regimes and let their currencies appreciate.  And it requires a cooperative approach to solve, because emerging economies individually will be less likely to move, unless they are confident other countries would move with them.
Japan acted on its own without a coordinated effort  into the currency market  for the first time in six years, buying dollars to weaken the surging yen  

This problem exposes once again the need for an effective multilateral mechanism to encourage economies running current account surpluses to abandon export-oriented policies, let their currencies appreciate, and strengthen domestic demand.  This is a necessary complement to the adjustments being undertaken by countries running current account deficits.  A cooperative re balancing of policy in this direction would be better for overall growth.

This issue was well-known to the group of economists who gathered in Bretton Woods, New Hampshire, to refashion the war-ravaged global financial system in 1944.  The Articles of Agreement of the IMF, drafted at that conference, contain a now-obscure paragraph calling on the Fund to issue reports on countries with "scarce currencies"--what today we would call countries running persistent surpluses--"setting forth the causes of the scarcity and containing recommendations designed to bring it to an end."  That clause now reads like a relic of a bygone monetary era.  But the problem it was drafted to address--the threat to global financial stability posed by persistent, large surpluses--is as salient today as it was then.

This brings me to a third issue on the international agenda, the reform of the architecture of economic cooperation.

The Framework, called the "Framework for Strong, Sustainable and Balanced Growth," was designed to create stronger incentives for rebalancing growth, as the world recovered from the crisis, with higher savings in countries like the United States, complemented by reforms to strengthen domestic demand in surplus countries like China, other emerging economies, Germany, and Japan.

We agreed to pursue these two paths in parallel.  Each involved a change in the rights and responsibilities of the major economies, both emerging and advanced.
We have moved aggressively to do our part to help bring the world out of crisis.  We are working very hard to repair our financial system, to fix what was broken, and to reduce the future risk of financial crises here at home.  We have seen a very significant increase in private savings by households.  Our external deficit has fallen sharply, and we are financing at home a much larger share of the fiscal deficits we inherited.

We still have a lot of challenges ahead of us to strengthen growth and to restore fiscal sustainability.  And we expect to work closely with Congress in the months ahead on how best to move forward.   
 Mr. Geithner said that “China will be less likely to move, to allow its currency to appreciate more rapidly, if it’s not confident that other countries will move with it.”
His warnings were echoed, in crucial respects, by the I.M.F., which released its latest World Economic Outlook on Wednesday.


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