Daily Archives: October 5, 2011

Once again US Congress is finding it more convenient to play the China currency card as the panacea for America’s economic woes, rather than deal with the difficult issues in President Barack Obama’s recent employment bill.

Many within China thought that given recent developments, criticisms of its exchange rate policies would become more muted. After all, it has continued its policy of gradual appreciation of five to six per cent annually. With the euro crisis and strengthening US dollar, the renminbi has been the exception in appreciating, while other major currencies have depreciated. And although reserves continue to pile up, this is seen as having more to do with capital inflows seeking higher returns – encouraged by expansionary US monetary policies – than by misaligned exchange rates.

While a full-blown trade war is not in China’s interests, its leadership will not let any perceived negative action go unchecked. If Congress gets its way, the net impact will not be more American jobs, but reduced global demand and higher prices for US consumers. America should worry more about maintaining its position at the upper end of the technology spectrum than futile currency wars. Read more >>

The absence of political leadership in addressing the crisis of the euro is not surprising, given the fact that whatever is done – or not done – will lead to some redistribution of wealth and income.
Until four simple truths are explained to, and accepted by, Europe’s electorates, it will be impossible to move forward.

What cannot happen, in the short term, is for one or more countries leave the euro. Leaving a currency that will continue to exist elsewhere, within a single financial market, is highly problematic. Pressing the ejector button now could send the whole aircraft tumbling earthwards.

What leaders must explain is that, firstly, over the medium term there is no alternative to some form of federal fiscal arrangements. Second, that in the period before longer term fiscal transfer arrangements can be put in place, some euro area governments will need debt relief. And lastly, that the European Central Bank will need support, from governments and their taxpayers, to provide indefinite liquidity to maintain the machinery of day-to-day economic activity. This need not affect its operational independence.

Until the eurozone’s leaders have explained these four unavoidable facts we will all be going up blind alleys, when time is of the essence in averting potential economic and social disaster.
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Europeans, and with them the rest of the world, are discovering what all doctors know – a persistently misdiagnosed and incorrectly treated infection can eventually threaten even the healthiest part of the body, thus requiring more drastic medical intervention whose effectiveness is less assured. This is what is happening in Europe today. A debt and growth crisis in the outer periphery of the eurozone has been allowed to destabilise the inner periphery and the outer core. In addition, signs of dislocations are now visible in the inner core – both through the banking system and directly.

In one case, that of Dexia, European governments are being forced to counter worrisome fragility. Spreads on German credit default swap have quietly widened to around 120 basis points in the last few days. And the stress is no longer limited to the continent. Reflecting the high interconnectivity of global banking, some American institutions have also come under pressure.

Many around the world have witnessed the deepening crisis with a mix of astonishment, concern and, now, fear. Those who already rang the alarm in the hope of spurring effective policy actions are being joined by others who previously refrained from doing so. The priority now is to contain a crisis that risks seriously undermining global economic growth, jobs, financial stability and social cohesion. Read more >>