What QE means for the world: Positive-sum currency wars

Feb 14th 2013, 23:24 by G.I. | WASHINGTON, D.C.

Brazil’s finance minister coined the term “currency wars” in 2010 to describe how the Federal Reserve’s quantitative easing was pushing up other countries’ currencies. Headline writers and policy makers have resurrected the phrase to describe the Japanese government and central bank’s pursuit of a much more aggressive monetary policy, motivated in part by the strength of the yen.

The clear implication of the term “war” is that these policies are zero-sum games: America and Japan are trying to push down their currencies to boost exports and limit imports, and thereby divert demand from their trading partners to themselves. Currency warriors regularly invoke the 1930s as a cautionary tale. In their retelling, countries that abandoned the gold standard enjoyed a de facto devaluation, luring others into beggar-thy-neighbor devaluations that sucked the world into vortex of protectionism and economic self-destruction.

But as our leader this week argues, this story fundamentally misrepresents what is going on now, and as I will argue below, what went on in the 1930s. To understand why, consider how monetary policy influences the trade balance and the exchange rate.

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The global economy: Phoney currency wars

The world should welcome the monetary assertiveness of Japan and America

Feb 16th 2013 |From the print edition
OFFICIALS from the world’s biggest economies meet on February 15th-16th in Moscow on a mission to avert war. Not one with bombs and bullets, but a “currency war”. Finance ministers and central bankers worry that their peers in the G20 will devalue their currencies to boost exports and grow their economies at their neighbours’ expense.

Emerging economies, led by Brazil, first accused America of instigating a currency war in 2010 when the Federal Reserve bought heaps of bonds with newly created money. That “quantitative easing” (QE) made investors flood into emerging markets in search of better returns, lifting their exchange rates. Now those charges are being levelled at Japan. Shinzo Abe, the new prime minister, has promised bold stimulus to restart growth and vanquish deflation. He has also called for a weaker yen to bolster exports; it has duly fallen by 16% against the dollar and 19% against the euro since the end of September (when it was clear that Mr Abe was heading for power).

American growth vs. the world: At the top of an underperforming class

Dec 17th 2012, 22:13 by G.I. | WASHINGTON

[Greg Ip] FOR those who started out the year optimists on American growth (such as me), 2012 was sobering. It looks like America will end the year having grown about 2%, according to Deutsche Bank, marginally below the average pace since the recovery began in mid-2009.Why was it disappointing? In great part part because the rest of the world had an even worse year. Take a look at the nearby table. Of the world’s four major developed economies plus China, America was the only country to grow roughly as fast as the International Monetary Fund projected in the fall of 2011. Europe and the U.K. actually contracted, while China (and several other emerging economies) grew notably less briskly.

Emerging markets: The great slowdown

A sticky spell for the emerging world carries warnings for its long-term growth

Jul 21st 2012 | from the print edition

IN THE past decade emerging markets have established themselves as the world’s best sprinters. As serial crises tripped up America and then Europe, China barely broke stride. Other big developing nations paused for breath only briefly. Investors bet heavily that rapid growth in emerging markets was the new normal, while leaders from Beijing to Brasília lectured the world on the virtues of their state-centric economic models.

Lately, though, the sprinters have started to wheeze. Last week China reported its slowest growth in three years (see article). India recently recorded its weakest performance since 2004. Brazil has virtually stalled. This week the International Monetary Fund sharply cut its growth forecast for three of the four so-called BRICs; only Russia was spared (and even there growth is vulnerable to falling energy prices). Some investors darkly recall the developing world’s crisis-prone history and wonder whether the worst is yet to come.

No crisis looms, but serious concern is justified, for the emerging world faces two distinct risks: a cyclical slowdown and a longer-term erosion of potential growth. The first should be reasonably easy to deal with. The second will not.

Revival of the fittest

By rich-world standards, the emerging markets are still doing exceedingly well. The IMF still reckons developing economies will grow by 5.6% this year. Moreover, this deceleration is partly intentional. When the global financial crisis struck, emerging economies responded energetically: China launched a huge stimulus, Brazil’s state-owned banks lavished credit, interest rates were slashed. They succeeded so well that by 2010 they were forced to reverse course. To squash price pressures they raised interest rates, curbed speculation and allowed their currencies to appreciate. With a lag, that tightening has had the predicted result.

Greece and the euro: What Argentina tells us about Greece

Feb 16th 2012, 19:16 by G.I. | WASHINGTON D.C.

[Greg Ip]The Free Exchange column in this week’s print edition is a guest article by Mario Blejer and Guillermo Ortiz, former central-bank governors of Argentina and Mexico respectively. They note that some advocates of Greek exit from the euro cite Argentina’s abandonment of its currency board in 2002. The peso devaluation that followed the collapse of the currency board led to a boom in Argentine exports and growth. Mr Blejer and Ortiz say these advocates understate the chaos that occurred in Argentina, and how much worse it would be in Greece:

Austerity and the markets: The perils of prudence

More evidence that austerity can backfire

Jan 28th 2012 | WASHINGTON, DC | from the print edition

[Greg Ip] THE fiscal hawks should be pleased. For all the hand-wringing about public profligacy, budget deficits across the rich world fell by about 1% of GDP last year. Moreover, that was almost all the result of policy actions (spending cuts and tax rises) rather than cyclical effects.Germany, France, Spain and Italy all managed to reduce their structural budget deficits, the latter three thanks to austerity. All are expected to reduce those deficits further this year, the International Monetary Fund said on January 24th. But this may not be good news. Austerity can unnerve markets, not calm them.

China’s economy and the WTO: All change

In two articles, we examine how China has been altered by its entry into the WTO ten years ago. First, the economy.

[By Greg Ip and The Economist’s Asia Economics Editor] THE World Trade Organisation (WTO), like many clubs, denies patrons the right of automatic readmission. Having quit the organisation’s predecessor shortly after the Communist revolution of 1949, China had to wait 15 long years to gain entry after reapplying in the 1980s. The doors finally opened on December 11th 2001, ten years ago this week.

The price of re-entry was as steep as the wait was long. China had to relax over 7,000 tariffs, quotas and other trade barriers. Some feared that foreign competition would uproot farmers and upend rusty state-owned enterprises (SOEs), as to some extent it did. But China, overall, has enjoyed one of the best decades in global economic history. Its dollar GDP has quadrupled, its exports almost quintupled.

Free trade and the yuan: One step forward, one back

As trade deals head towards approval, a backlash grows against China

Oct 8th 2011 | WASHINGTON, DC | from the print edition

 [Greg Ip] THIS was supposed to be a good week for American trade policy. On October 3rd Barack Obama submitted three long-stalled trade agreements to Congress for ratification. Republican and Democratic leaders promised speedy passage. If all goes as planned, the pacts with Colombia, Panama and South Korea could be ratified in time for a state visit on October 13th by Lee Myung-bak, the Korean president.

But that advance for trade was tempered by a revival of protectionism against China.

Central banking and the crisis: Emergency manoeuvres

With developed economies in dire straits, central bankers have taken the tiller. Not all of them are happy about that.

Aug 13th 2011 | from the print edition

[Greg Ip]

COMETH the hour, cometh the central bankers. On August 8th the European Central Bank (ECB) began buying Italian and Spanish bonds in an effort to stop the sovereign-debt crisis from crippling two of the continent’s largest economies. And a day later America’s Federal Reserve made an unprecedented commitment to keeping interest rates at more or less zero for two more years to keep a stalling economy out of recession.

In both cases the dramatic steps were taken in the face of political failures to get to the heart of the problems at hand. The fact that they took both banks well outside their normal zones of operation was underscored by the internal dissent both moves faced, dissent rarely seen in the consensus-driven world of central banking.

The initial market reaction was positive, at least on one side of the Atlantic. Yields on Italian and Spanish bonds fell sharply relative to Germany’s. In America Treasury yields fell and stocks rose—but not for long, as equity markets fell again on August 10th. No one should see this as a fundamental turnaround. The ECB’s earlier bond-buying hasn’t saved smaller countries from punitively high government-bond yields; the Fed’s previous interventions haven’t spurred a robust recovery. The big issues of America’s stagnant economy and Europe’s debt crisis remain in the hands of elected politicians who still seem inadequate to the task. But at least central banks have shown themselves ready and able to act.

The entire article is linked here.

Economics Focus: The Service Elevator

Can poor countries leapfrog manufacturing and grow rich on services?

May 19th 2011 | from the print edition

[Greg Ip]

INDIA’S services revolution has dazzled businesses in the rich world, turning Indian companies into global competitors and backwater cities such as Hyderabad into affluent, sophisticated technology centres. Yet economists have been less star-struck, clinging to the received wisdom that has prevailed since the industrial revolution: modernisation runs from agriculture through manufacturing and only later to services. Now some have broken ranks.

The logic supporting the conventional path towards an advanced economy is straightforward. Development typically involves moving workers from low-productivity activities such as subsistence farming to high-productivity sectors. That points to a shift into manufacturing because it lends itself to specialisation and economies of scale, both essential for rising output per worker. As first Japan, then Taiwan and South Korea, and now China have demonstrated, manufacturing can also accelerate development because its output can be exported to rich countries.

Services, in contrast, appear to be a graveyard for productivity. Because a haircut or a restaurant meal has to be delivered in person, there is almost no potential to exploit economies of scale and to export. People consume more services not when technological advance lowers their price but when they have reached a level of affluence that satisfies most of their other needs. Indeed William Baumol famously argued in the 1960s that as countries grew richer and their citizens became keener on buying services, their productivity growth would inevitably slow.

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That conventional wisdom is now under fire, in a book edited by Ejaz Ghani of the World Bank and a related article he wrote with Homi Kharas of the Brookings Institution and Arti Grover also of the World Bank on the VoxEU website. The authors argue that technology and outsourcing are enabling services to overcome their former handicaps. Traditional services such as trade, hotels, restaurants and public administration remain largely bound by the old constraints. But modern services, such as software development, call centres and outsourced business processes (from insurance claims to transcribing medical records), use skilled workers, exploit economies of scale and can be exported. In other words, they are just like manufacturing. If that is the case, then poor countries should be able to go straight from agriculture to services, leapfrogging manufacturing.

 For the entire article, click here.