Currency wars evade domestic frailty

This is my comment from the latest Fund Strategy.

Viewed from a global perspective the world’s economic leaders are trying to achieve the impossible. Each of them is attempting to depress their own currency so as to gain an advantage in world trade.

Yet, by definition, all currencies cannot fall against each other. It is akin to all the teams in a football league losing their matches on a Saturday.?This was the background to the intensified discussion of currency wars in the run-up to last weekend’s joint meeting of the International Monetary Fund and World Bank. The world’s leaders talked openly of currency manipulation and currency wars, yet they blamed others for the problems. None of them was willing to accept their share of responsibility for the world economy’s plight.

Most of the rich countries are pumping huge amounts of liquidity into their economies in an attempt to stave off collapse. They are also, to a greater or lesser extent, contemplating a fiscal squeeze to strengthen their public finances. Their hope is that boosting exports will play a key role in achieving a strong recovery.

The position of the emerging world is slightly different. Emerging economies are typically growing much faster than their western counterparts and they want to stay that way. For that reason they want to resist the upward pressure on their currencies so that they can maintain export-led growth. Often they accumulate huge foreign exchange reserves in a desperate attempt to achieve this objective.

But just as it is impossible for all currencies to fall it is also true that not all countries can be net exporters. Every country can benefit from exporting but not every nation can have a trade surplus.

In essence, each country is shying away from addressing its own domestic weaknesses. Rather than work out how to restructure their econo­mies to bolster productivity the temptation is to go for short-term or easy solutions such as boosting net exports and injecting cheap money into the economy. When these measures fail to generate a recovery the temptation is to condemn other nations as currency manipulators.

As a result of this prevarication the global imbalances that were central to the recent economic crisis remain intact. Although few are willing to acknowledge it openly, the world has done little to resolve its fundamental economic weaknesses. The main achievement is to have averted collapse.

The priority of national leaders should be to tackle their domestic weaknesses. Scapegoating others for economic problems is a dangerous diversion from tackling the challenges ahead.

* 16 October update. Sean Collins has written an article on the same subject for spiked.