IMF Finance Ministers' Meeting Fails to Avert Currency War

Cheaper currencies would help out most of the developed world's economies boost their exports, and eventually improve their health. However, currencies cannot all decline together; strength and weakness are relative terms. The one nation that needs a stronger currency, China, has political reasons for doing nothing to change the current rate. So, it was no surprise when this week-end's IMF finance ministers meeting ended with no real progress on currency rates.

Part of the problem is the low interest rates in the US, Japan, UK and eurozone. These are designed to keep domestic demand from shriveling up and blowing away, but the side effect is they send a lot of capital to emerging markets in search of a greater return on investment. That makes currencies in emerging markets rise. That, in turn, results in policy moves in those markets that could be harmful to the global economy as a whole. Reuters reports, "Brazil has doubled a tax on foreign purchases of local bonds. South Korea has warned of new trading limits, and India has said it may intervene in currency markets."

In the US, political pressure is increasing to make China do something to increase the value of the yuan. Democratic Senator Jack Reed of Rhode Island told Bloomberg Television's "Political Capital with Al Hunt" that the Senate may consider a lame-duck session to address the issue. On the fringes, there is talk of tariffs against China to balance out the overly weak yuan. A trade war would almost certainly follow.

So, the question is what can be done? IMF Managing Director Dominique Strauss-Kahn has been given the job of reporting on how policies in one area affect currencies in another. These reports will cover the US, China, the UK and the euro area. "The need to have this kind of spillover report has been discussed for months and now it's part of our toolbox," the director said.

Unfortunately, the IMF hasn't exactly covered itself in glory when dealing with similar issues in the past. In 2006, the IMF oversaw efforts to rebalance the global economy. The lack of success speaks for itself. In addition, China has been more than reluctant to accept the fund's suggestions in the past.

The next chance to get something done comes next month in Seoul, when the G-20 meets. However, the G-20 is probably too big a venue to get the kind of results the world needs. Given the choice between muddling through and taking action, the G-20 is likely to opt for the former. That is preferable to policy actions that make things worse, but it is hardly an inspiring prospect. The truth is that more pain lies ahead, and politicians the world over are trying to ensure that their constituents don't suffer, which more or less means everyone will suffer more than is necessary for longer than needed.

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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