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Sol Sanders Archive
Wednesday, October 13, 2009     INTELLIGENCE BRIEFING

About the 'currency war' . . .
it has already broken out

Annual Washington jamborees of those monuments to post-World War II international economic cooperation, the World Bank and the International Monetary Fund, dramatize by their increasing irrelevance the continuing world economic crisis. Bloated, pampered, tainted bureaucracies whose research is increasingly suspect, they have no solutions.


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Ultimately, when VIPS go home and November elections dust settles, but recovery continues to stutter, the Obama Administration could face stark, bilateral decisions on international fiscal and monetary policies.

For while just about everyone warns against “a currency war”, that’s exactly what has broken out. Individual governments are intervening in markets to maintain exports and minimize imports. Japan’s central bank is fighting off the highest yen to dollar in 15 years. South Korea slyly intervenes to undercut the yen. Brazil, to preserve its commodities bonanza, slaps on taxes to slow speculative inflow — its real up 25% since January 2009. South Africa considers something similar with a rising rand costing foreign sales. Greece, Ireland, Spain and Portugal refinance crippling debt at increasingly higher cost, desperately hoping to avoid leaving the euro. Partially responsible for their profligacy, export-led Germany promises a new bandaid, a European crisis management set-up, as an appreciating euro cuts into its trade.

Despite all this frenzied activity — if momentarily frightening off speculators — intervention will not in the end be effective. “Beggar your neighbor” — shifting responsibility from one national economy/currency to another — cannot cure a worldwide recession.

The biggest manipulator of all, China, makes cuddly noises about international cooperation but boosts export subsidies, buttressing a hugely undervalued, nonconvertible yuan. Its unprecedented reserves from trade surpluses — a $2.5 trillion hoard, mostly dollars including a third in U.S. Treasury securities — discombobulates the system.

The Obama Administration’s remedies have included a proposed doubling of U.S. exports over five years, trimming oil imports with subsidized alternatives, wheedling China into currency concessions, health care reorganization, new taxes, and an expansionary monetary policy to pump up domestic recovery along with expanded government. This program seems unlikely to succeed, certainly not in the near term. And to quote the noted British economist, John Maynard Milord Keynes, “… in the long run we will all be dead…”

The reasons are obvious: cash-loaded U.S. companies, facing a vicious circle of lowered consumption because of high unemployment and tightened bank credit, refuse to invest/innovate. They see Washington policies as both inimical to business and contributing further insecurity. Nothing so mocks Administration “green energy” as subsidized American companies moving production to China or closing in Gulf drilling, thereby lopping tens of thousands of jobs and increasing petroleum imports. The Fed’s “quantatative easing” [increasing money in circulation] gets very close — to quote Keynes again — “…to pushing on a string…” with a still unresolved home mortgage market breakdown.

In the post-election era, whatever domestic turns a conservative Congressional majority [Republicans and rightwing Democrats] forces on the Obama Administration, international issues will pose even greater tests for strategy — and risk taking.

It is not hard to see where any new initiative might begin. About half the $55.2 billion U.S. trade deficit in July was with China. That’s good for Walmart. And China’s huge overexpansion of infrastructure is manna for raw materials exporters such as Brazil, Australia and Angola.

And while huge international payments deficits [$378.5 billion in 2009] along with concern about Washington strategies have cheapened the dollar and therefore exports, a good question is how much America could sell China even if Beijing’s currency were floated. Chinese consumption increasingly falls as a percentage of its soaring gross national product — despite tales of inordinate luxury from growing class and regional disparities. Hidden “non-tariff barriers” also block U.S. imports.

Soviet- style Chinese technocrats struggle to centrally plan, stuck with humongous dinosaur government companies and with an accelerating military expansion devouring resources. Meanwhile, Communist apparatchiks scuffle for “fifth generation” posts next year. Major readjustment would be catastrophic, Beijing fears — probably justifiably. Their underprivileged private sector, disproportionately responsible for two decades’ of remarkable progress, would wilt. Labor-intensive manufactures are already fleeing to Southeast and South Asia as wage pressure grows from rising social friction.

But without drastic Beijing moves, the Obama Administration, with Congress at its heels [if not Wall Street, hankering after Chinese financial industry growth] may not be able to stave off tariffs on Chinese imports. And once protection against Beijing got a green light, it might be hard to exempt other foreign sellers. That would turn America’s back on the World Trade Organization — which Beijing joined but did not honor — and the whole post-World War free trade religion. Higher imports would increase U.S. living costs since outsourced manufactures could not be quickly replaced by domestic production. All that might maximize the Fed’s loose money, leading back to the old threat of inflation — perhaps with no growth, “stagflation”.

There isn’t any magical “economic” ideological solution — neither from Smith, Marx, Keynes nor Friedman. Nor is a visionary yet sighted resembling Keynes [who in 1944 gave us the Bank and Fund at Bretton Woods] to dream up new, acceptable, effective international collaboration.

Sol W. Sanders, (, writes the 'Follow the Money' column for The Washington Times . He is also a contributing editor for and An Asian specialist, Mr. Sanders is a former correspondent for Business Week, U.S. News & World Report and United Press International.

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