EDITORIAL: 'Currency wars' undermine the global economy

Editorial Desk in Bangkok/The Nation
Asia News Network

Bangkok (The Nation/ANN) - The International Monetary Fund (IMF) is now flip-flopping in regard to "currency wars". On October 7, 2010, Dominique Strauss-Kahn, the then managing director of the IMF, told the BBC that global currency wars "pose a real threat" to economic recovery.

Strauss-Kahn was speaking two years after the collapse of the US financial system, which also passed on the contagion effect to Europe.

Instead of restructuring their financial system and economies, the advanced economies pumped taxpayers' money in to prop up the big banks and corporates, and printed money to keep their systems from falling apart.

At the G-20 meeting scheduled for today and tomorrow in Moscow, the International Monetary Fund has changed its track. The IMF's spokesman Gerry Rice said talk of currency wars was "overblown". He played down concerns on Thursday that the currency war launched by the advanced economies, namely the United States and Japan, could lead to competitive devaluations. The IMF, Rice insisted, has seen now abnormal movements in international exchange rates. Earlier, the IMF's chief economist saw no problems of countries' adopting drastic measures to try to put their economies back on track.

With this passing of judgment, it is clear that the IMF, which looks after global macroeconomic and foreign exchange stability, is siding with the advanced economies. The US Federal Reserve and the Bank of Japan are now undertaking aggressive monetary policy - zero interest rate and money printing - to combat deflation. Earlier the Bank of England also undertook money printing to the tune of 375,000 billion pounds sterling. And the European Central Bank violated its mandate by briefly engaging in money printing to save the eurozone before the Germany talked it out of this.

Surprisingly, Japan is now being singled out as the main culprit although policy makers from other advanced economies also share the collective sin of money printing, which creates hot money and destabilises the international monetary system.

Japan has been less diplomatic in its declaration of a currency war.

Shinzo Abe, the prime minister, has taken a hands-on approach to repair the Japanese ailing economy. The Japanese currency war is clear in its target and can be summarised as follows: First, the Bank of Japan, which keeps its policy rate at 0.10 per cent, will monetise the government debt. Second, the yen exchange rate is targeted to 95-100 to the US dollar in the medium term outlook. The stock market is targeted to climb to 13,000 by the end of March.

The US Federal Reserve is also engaging in a currency war by printing $85,000 billion a month to buy out mortgage-backed securities from the banks and also monetise the government debt. The Fed, which keeps its rate at 0.25 per cent, will continue this monetary easing policy until unemployment falls below 6.5 per cent. Now unemployment is near 8 per cent.

These currency moves have shocked BRICS countries as well as other emerging-market economies, including Thailand. The G-20 is clearly divided between the advanced economies - the UK, the US, Japan, France, Canada, Italy, Germany - and emerging countries such as Russia, China, South Korea, India, Brazil, Argentina, Indonesia and the like.

Top leaders of Russia, South Korea, Germany, Brazil, and China have all expressed their concern over the currency moves, which drive up the value of their currencies and undermine the competitiveness of their exports. If they decide to enter the game - like Veneuzuela, which has devalued its currency by 32 per cent - the world would be plunged into competitive devaluations. At the end of the day, competitive devaluations would lead to run-away inflation or hyperinflation. Nobody will win with these currency wars.