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

One reply on “Currency Conflicts Come to Prominence Again”

  1. “importing over $2 billion a day of capital” ??

    This is a highly misleading approach to reality. It’s more useful to just be honest and say that we’re importing $2 billion/day of real goods … BECAUSE the producers are desperate to get the $US we credit them in return.
    This is no different from accepting a poor neighbors offer to do your house cleaning. They need the entry-level cash in a time-fo-money swap, and your task is to add value to the extra time you now have freed up.

    Why they want those $US so badly, and what they do with them, is THEIR problem, not ours. The only issue US citizens should be concerned with is what to do with all the basic finished goods work others are willing to provide for us, and where we should be investing all of our resulting free time and human resources.

    Nothing occurs in a vacuum and, with double entry accounting, every nominal credit is matched to someone else’s nominal debit. Afterwards, mapping to REAL GOODS budgets and real context outcomes then goes through a “THINKING” filter. The penultimate real cost is still the cost of coordination, which translates to the credit/debit ratio of thinking or not thinking.

    Reality is not dictated by nominal accounting, ONLY by real outcomes. We always have new degrees of freedom to master new contexts. Fixation on yesterday’s nominal metrics is never where the moment of adaptation lies for an evolving aggregate, whether an ancient family or tribe, or a modern nation state.

    We’re all context-nomads, and the difference between using nominal metrics to set national tolerance limits is remarkably analogous to the difference between snail strategies and army ant strategies. You can hoard your nominal metrics and hide in them too, or you can let them float freely, and smash any/all context barriers by going over, under, around & through them, by any permutation possible.

    Conclusion? Manage real outcomes, and let currency metrics float, as originally intended. Metrics follow evolution of real adaptations to real contexts, not the other way around.

Comments are closed.