Currency Conflicts Come to Prominence Again

From the mid 1990s onwards, the US trade balance deficit has steadily become bigger. This is a centrepiece of the problem of `global imbalances’. Starting from values of roughly zero, this got all the way to values like $70 billion a month, where the US was importing over $2 billion a day of capital to pay for the trade deficit. Here’s the picture:

The US trade balance (goods+services, per month, seasonally adjusted)

Warning for Indian readers: In India, the term `trade balance’ pertains only to merchandise trade. In the US, the monthly trade data covers both goods and services. So it is a meaningful measure of what is going on in international trade, unlike the corresponding Indian data.

Bretton Woods II first broke down in the financial crisis. In the downturn, the mighty American consumer purchased fewer 50″ television sets. The US trade deficit dropped nicely all the way to $25 billion per month. Alongside a rise in the US savings rate, this looked like a world which was rebalancing.

In recent months, this movement reversed itself and the US trade deficit once again started getting worse.   A deterioration of $20 billion per month is visible; i.e. a deterioration of $240 billion a year. Suddenly, the story of global imbalances righting themselves came under question. The present US run rate is around $40 billion a month or $0.5 trillion a year.

Alongside this, we have news that the Chinese reserves rose by $194 billion in Q3 2010. The Chinese seem to have also passed on some of their problems of exchange rate pegging upon their neighbours by purchasing Japanese, South Korean and Indonesian assets. I am not aware of such behaviour having been observed prior to this in human history. Japan, South Korea and Indonesia have taken unkindly to this behaviour. Given the opacity of the Chinese regime, one can’t help wonder if similar things are going on through less visible channels – e.g. a Chinese sovereign wealth fund buys $10 billion of OTC derivatives on Nifty.

So we seem to be headed for quite some escalation of conflict over the Chinese exchange rate regime. Here are some interesting readings on the subject:

Other Related Articles

Global Imbalances:  Is Germany the New China?  A Sceptical View  by Joshua Aizenman and Rajeswari Sengupta

Plaza II is the Wrong Approach for Global Rebalancing  by Yiping Haung

Currency Manipulation by Asian Central Banks by Ajay Shah

China and U.S. Should Stop Finger Pointing and Get to Work  by Jason Rines

Share this Econintersect Article:
  • Print
  • Digg
  • Facebook
  • Yahoo! Buzz
  • Twitter
  • Google Bookmarks
  • LinkedIn
  • Wikio
  • email
  • RSS
This entry was posted in Business News and Analysis, Government, International Economic data, Trade Data and tagged , , , , , . Bookmark the permalink.

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.