FRIDAY, OCTOBER 8, 2010
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Economy & Business A13
IMF chief says currency shouldn’t be a ‘weapon’
STEVEN PEARLSTEIN in search of a magic elixir to ward off deflation F
inanceministers, central bankers and big-deal fi- nanciers have arrived in
Washington for the annual Oktoberfest of economic policy- making, and in case you couldn’t tell fromthe headlines over the past few days, they’re plenty worried that the global recovery is about to lose steam. Central bankers, having
pushed overnight interest rates to zero, are contemplating cre- ative new ways to increase the supply ofmoney and credit and prevent a deflationary dynamic fromtaking hold. The Bank of Japan took the first step by an- nouncing it would pump the equivalent of $60 billion into the economy by buying not only government bonds but also short-termIOUs frombanks and corporations and packages of securitized real estate loans. The European Central Bank is scooping up the bonds of some of itsmost debt-soakedmember countries. And Federal Reserve Chairman Ben Bernanke seems to have convinced his colleagues that it’s time to print up another trillion or two to buy Treasury notes and bonds with longer maturities. At this point, the risks of cen-
tral banks doing nothing (defla- tion, continued high unemploy- ment) are greater than the risks of cranking up themonetary printing press (future inflation). But nobody should expect it will prove amagic elixir for the economy. A number of economicmod-
elers estimate that the unem- ployment rate would remain above 9 percent whether the Fed expanded its balance sheet by $500million or $2 trillion. The reason is that the normal
channels through whichmone- tary easing works are pretty worn out. Interest rates are al- ready so low that pushing them lower won’t inducemore bor-
rowing. Households are of a mind to pay down debt, not add to it, and businesses have plenty of cash and don’t foresee the growth in sales that would justi- fy an expansion of capacity or product lines. The one channel that is work-
ing is the financialmarket. In recent weeks, prices of stocks and bonds havemoved higher in anticipation of the flood of cen- tral bankmoney; those higher prices, in turn, should help bol- ster confidence among business executives and wealthy consum- ers. The lower rates also will
boost the profits of banks, too many of which are hanging on by a thread and desperate to off- set the yet-unacknowledged losses they face fromcommer- cial real estate loans.
sales to the United States — it was to stemthe loss of global market share to competitors in China, Taiwan and other South- east Asian powerhouses that peg their currencies in some fashion to the dollar. Japan is hardly the only coun-
try anxious about a rise in its currency and its effect on ex- ports. South Korea and Brazil also have taken steps to blunt the impact of a rising currency, and European exporters have begun to grumble about the re- cent spike in the value of the euro. The fear now is that coun- tries will embark on a series of competitive devaluations that will lead to an outright trade war and destabilize the global fi- nancial system. At the core of this problemis China’s stubborn refusal to al-
Re-inflating financial bubbles isn’t generally considered a worthy goal for monetary policy, but it speaks to the growing desperation of Fed policymakers that they feel they have no choice but to resort to it.
Re-inflating financial bubbles
isn’t generally considered a wor- thy goal formonetary policy, but it speaks to the growing desper- ation of Fed policymakers that they feel they have no choice but to resort to it. Themore urgent issue on this
weekend’s agenda concerns ex- change rates and the threat that countries will start competing to devalue their exchange rates to bolster their economies. On this, too, Japan has taken the first step, intervening in curren- cymarkets to drive down the value of the yen against the dol- lar. Japan’s primary aim, howev- er, wasn’t to protect its export
lows its currency, the yuan, to gradually appreciate against the dollar to reflect the dramatic in- crease in China’s wealth and productivity. Allowing the yuan to float is a necessary first step in rebalancing a global economy that has become dependent on the United States consuming muchmore than it produces and China producingmore than it consumes. That imbalance was the root cause of the recent credit bubble, and as long as it persists it willmake it difficult for the United States to bring the unemployment rate down to an acceptable level. For years, China has been
playing rope-a-dope on the cur- rency issue, promising tomove toward amarket-based floating currency whenever tensions got too high but never quite getting around to doing it. And for years, top U.S. officials in vari- ous administrations have said that patience and persistence would work better than impos- ing the kind of retaliatory tariffs urged on themby angrymem- bers of Congress. But this week, Treasury Sec-
retary Timothy F. Geithner ef- fectively acknowledged that the strategy of all-carrot-and-no- stick had failed, and he began to turn up the heat on China. The secretarymade clear that the United States would no longer support China’s efforts to gain a leading role in organizations such as theWorld Bank and the InternationalMonetary Fund as long as it continued to underval- ue its currency and pursue other mercantilist policies. Geithner also hinted that the U.S. would pursue international sanctions against China if it continued to run large trade surpluses, favor- ing exports over domestic con- sumption. The response fromChinese
officials, and their running dogs in the U.S. business community, has been predictable. On the one hand, they say that the yuan is not all that underpriced and, in any case, that raising its value wouldn’t significantly affect the trade balance. Then in the next breath, they say that raising the exchange rate would force the closure of somany Chinese fac- tories and, in the words of Pre- mierWen Jiabao, “bring disas- ter to China and the world.” Thatmay be the kind of logic
that sways opinion down at the central committee, but it hardly inspires confidence that China is ready to take its rightful place in global economic leadership.
pearlstein@washpost.com
Central bankers are huddling
Director calls China’s renminbi ‘substantially undervalued’
BY HOWARD SCHNEIDER The head of the International
Monetary Fund on Thursday said that China’s currency is “substan- tially undervalued” and that he feared countries had begun view- ing exchange rates “as a weapon” in the competition for economic growth. “We have been one of the insti-
tutions to repeatedly say that we believe the renminbiwas substan- tially undervalued and that some- thing had to be done to fix this problem,” Dominique Strauss- Kahn, IMF managing director, saidat anews conference opening the agency’s annual meeting. “Many do consider their currency as aweapon, andthis isnot for the goodof theworldeconomy.” His comments are part of the
escalating tension over world ex- change rates at a time when the surgeof investment intoemerging marketshas forcedupthe value of local currencies—andthreatened to make the exports of countries such asBrazil andColombiamore expensive. China has fought that trend,
keeping the value of its renminbi, or yuan, relatively stable—a poli- cy that has stoked a political con- troversy in the United States that hasboiledover intotalkofaglobal “currencywar.” Strauss-Kahn said he did not think the issue would deteriorate that far, but he said he isworriedthat themoodforglobal cooperation on economicmatters appearedto be fraying. Others went further. World
Bank President Robert Zoellick noted that awave of trade protec- tionismsparkedtheGreatDepres- sion in the 1930s, and he said policymakers need to calm the current dispute before it gets out of hand. “If one lets this slide into conflictor formsofprotectionism, we then risk repeating the mis- takes of the 1930s,”Zoellick said. Officially, China allows its cur-
rency to float within a limited range of value and says it intends to increase that range to allowthe
6
on
washingtonpost.com A ‘currency war’?
See video of IMF officials discussing the issue at
washingtonpost.com/business.
renminbi to appreciate over time. But China also argues that coun- tries such as the United States havemade toomuch of the issue, and it contends that a rise in the value of the renminbi would do little, for example, to curb Ameri- ca’s broad appetite for Chinese imports or trim America’s large tradedeficit. But Strauss-Kahn put the issue
at the center of a broader effort to smoothout tradeflowsaroundthe world, so large exporting nations such as China rely more on their local consumers— andlessonthe United States — while debtor na- tions curb their borrowing. That process is considered im-
portant to creating a healthier global economy, and Strauss- Kahn said it can’t happen if coun- tries don’t allow their exchange rates to fluctuate based onmarket forces. The shift of capital and growth toward China and other fast-growing, emerging markets means their currencies will natu- rally rise in value, and “to oppose this in the medium term won’t help,” Strauss-Kahnsaid. The renminbi has risen only
about 2 percent against the dollar in the past several months after Beijing officials announced they would introduce a more flexible exchange rate. Some analysts say the renminbi would hit its true market value with an increase of 25percent or 40percent. China joined the World Trade
Organization in 2000, and its ag- gressive currency management quickly emerged as a contradic- tion to its free-market commit- ments. It’snowbecomingatest for the IMF. U.S. Treasury Secretary Timo-
thyF.Geithnerurgedthefundthis week to become more active in resolving the issue. He said it made little sense to give emerging nationssuchasChinaagreatersay in IMF affairs if they were not going to play by the same rules as other leading economicnations.
schneiderh@washpost.com
One of them will have an impact on the future of Africa. Let’s make sure it’s the right one.
Office of the UN Secretary-General’s Special Envoy for Malaria
Malaria takes the life of aNigerian child every two minutes. And it’shurting the economies of Sub-Saharan Africa, costing $12 billion dollars ayear in lost growth. Change needs to come fast. Starting in 2005, the World Bank’sInternational Development Association (IDA), has committed nearly $300 million to fight malaria, complementing the work of the Government of Nigeria and other partners. Altogether, over 40 million mosquito nets have already been distributed and Nigeria is on track to be one of the first countries to achieve the UN Secretary-General’s target of universal net coverage by the end of this year.
Creating Change. Changing Lives.
IDA. The World Bank’s Fund for the Poorest.
www.worldbank.org/IDA
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