Speaking at the Canadian Consulate’s “Invest in Canada” luncheon on October 6, the Nobel Prize winning economist Joseph Stiglitz in effect threw in the towel over the ongoing currency wars. As reported by Reuters Stiglitz said that what the US was involved in amounted to a competitive devaluation of the dollar against other currencies that were also deliberately devaluing. However, he added, in his view, there was nothing to be done about this. It simply has to play itself out.
The other face of competitive devaluation is retarded revaluation, where states without free floating currencies and with massive export surpluses hold back the upward revaluation of their currencies to retain their export advantage. China, of course, is the major figure on the retarded revaluation front.
If Stiglitz is correct, and he seems to be, this has massive implications for what the G20 was trying to achieve – and succeeding – in its last two meetings. Then the emphasis was all on global cooperation to secure world wide regulation of the financial sector. Today, although finance ministers are still committed to re-regulation of the banks, the game has changed on two major fronts. Competitive devaluation is the very opposite of international cooperation. It is all about begger thy neighbour, and in the past when countries played these games, they quickly escalated to full-on protectionism (see for example Ian Fraser’s blog on this theme).
But back to those two major game changing fronts. Along with the “Devil take the hindermost” philosophy of competitive currency devaluation we also have ominous rumblings in the US housing market which some are interpreting as a potential re-run of 2008. Neither of these things, currencies nor the foreclosure saga in the US housing market, can be addressed via any future tinkering with the capital buffers and reserves of major banks. They are different games playing out in different spaces entirely, though both have the potential to kick the stuffing out of the banks yet again, the first through creating a wave of corporate failures, the second by crystallising a gigantic volume of bad debt currently being quietly carried on the books of major US banks.
All this is taking place at the same time as the IMF’s latest moves to reform itself into an institution capable of playing a major role in helping to stabilise the world’s financial systems – an exercise that could yet turn out to be about as useful as rearranging the deck chairs on the Titanic, but which nevertheless is worthy and needs doing. As IMF Managing Director, Dominique Strauss-Kahn told the press on October 9, at the end of a meeting of the IMF’s policy steering committee, that the organisation is close to wrapping up a package of reforms that will make the 187 member institution more reflective of the global economy. The IMF governing council is trying to redistribute the balance of power in the organisation from developed to emerging and developing economies, by paring 5% “quota share” from developed countries and giving this to under represented i.e. emerging countries. The idea is that developing countries who get a more central position in the game then face up to the obligation to “pay their way”, giving the IMF a win on two fronts, a more balanced view of the global economy via a stronger voice for developing economies, and more cash to do its good work with.
Strauss-Kahn said he hoped that the reforms would be in place by late January 2011. However, by then the world could be a rather different place and a rather more dangerous place. Against what is actually going on, the IMF Managing Director’s appeal to nations “to reject protectionism in all its forms” looks doomed to go unheeded.
Further reading on currency wars and global financial stability:
- What Would a New Bretton Woods Mean for the IMF? by Augusto Lopez-Claros
- New Dollar Area: The Makings of the Mess, by Brian Reading
- Globalization, Challenges and Threats—Where Will the WTO and Free Trade Go? by Mike Moore
Tags: banking , China , competitive devaluation , currency devaluation , currency wars , Dominique Strauss-Kahn , global stability , IMF , reform of the IMF , regulation , retarded revaluation