October 20, 2010Bernanke, Geithner Tread Carefully on Dollar
The U.S. government's recipe for stronger global economic growth has three ingredients. Big trade-surplus countries, notably China, should export less and rely more on their own consumers' spending. Big trade-deficit countries, notably the U.S., should export more and rely less on their consumers. For that to happen, the dollar needs to fall.
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke talk about the first two, but aren't explicit about the third. That's where newspaper columnists step in.
The logic, drawn from textbooks, is that a decline in the dollar will make U.S. exports cheaper for foreign customers, so they'll buy more, and will make Asian exports more expensive, so the world will buy less.
It's no magic elixir. "An exchange rate 30% lower is not going to be of much help to an unskilled or semi-skilled worker in the U.S. competing head-to-head with Chinese labor," Barry Eichengreen of the University of California, Berkeley writes in a forthcoming book on the dollar. But there's no way to achieve the much-discussed "rebalancing" of the world economy without a weaker dollar.
Alas, the world doesn't work as antiseptically as textbooks, hence the shouts of "currency war" from Brazil's finance minister, a comment that earned him private scoldings from peers at recent meetings in Washington.
Is this a war that the U.S. already has won, and all that's left is negotiating terms of surrender? After all, if the Fed prints enough dollars—"quantitative easing," or QE—the increased supply eventually will push down their price. Or does Yiping Huang, a Chinese academic and former Citibank economist, have it right when he says: "The U.S. did not win the past currency war with Japan. It is less likely to win a new war with China."
Or is this a war without victors? The Bank of England's Mervyn King suggested ominously this week that "conflicting policies" could produce "an undesirably low level of world output with all countries worse off."
The specter of every country trying to devalue more than competitors to spur exports stirs frightening images of the Great Depression. We're not there, yet. This dispute is more about speed. Governments and consumers in the U.S., Japan, U.K. and much of Europe are under pressure to cut debt soon; that means exporting more now. China is trying to prolong its shift away from exports for fear that it can't create other jobs in other sectors fast enough.
That tension shows up in foreign-exchange markets: Since Mr. Bernanke signaled Aug. 27 that the Fed was preparing to print more dollars, the dollar has fallen more than 6% against major currencies, but risen only a bit more than 2% against the yuan.
In this standoff, the innocent bystanders are emerging markets from Brazil to Israel to India. As investors flee low interest rates in the U.S., Europe and Japan, those countries' currencies are rising, endangering their exports. "The international monetary system today has become distorted," Mr. King said this week. "The major [trade] surplus and deficit countries are pursuing economic strategies that are in direct conflict. Those emerging market economies which have adopted floating currencies are now suffering from the attempts of other countries [China] to hold down their exchange rates, and are experiencing uncomfortable rates of capital inflows and currency appreciation."
In the old days, a handful of finance ministers or top leaders from the U.S., Europe and Japan would try to settle currency disputes over dinner—sometimes before a crisis, sometimes after. The Group of 20 is supposed to be the new forum for such talks because China is at the table. But it may simply be too big to negotiate a grand bargain.
Mr. Bernanke and Mr. Geithner are stepping delicately. As an academic lecturing Japan in 1999 ("significant yen depreciation would go a long way toward jump-starting the reflationary process") and as a Fed governor in 2002 ("there have been times when exchange rate policy has been an effective weapon against deflation," Mr. Bernanke was blunt. Last week, listing the pros and cons of printing more money last week, Mr. Bernanke didn't mention the inevitable impact on the dollar. No surprise.
"The danger is of a disorderly adjustment, of investors losing confidence in the dollar," says Mr. Eichengreen, the Berkeley economist. "The Fed is acutely aware of the risk. This is one reason QE2 will be incremental."
Mr. Geithner is doing an awkward straddle. On one hand, he said this week, the yuan is "significantly undervalued" (so the dollar should fall, at least against the yuan.) On the other, he insisted: "No country…can devalue its way to prosperity and competitiveness. It is not a feasible strategy and we will not engage in it."
What he wants to say is this: The dollar is going down. We all know that. The faster the Chinese get with the program, the better off we'll all be. But we're not pushing it down to avoid getting our fiscal house in order, fixing our schools, making our exporters as competitive as the Germans. And we really don't want the dollar to fall so fast that markets lose confidence in the U.S.
Oh, and as he acknowledged explicitly this week, we know the dollar isn't just our currency. It's the one in which business around the world—at least so far—is conducted. So let's all be careful.
http://online.wsj.com/article/SB10001424052702304011604575564190336685072.html
