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).

Two things to remember about Japan

Nov 14th 2011, 22:57 by G.I. | WASHINGTON

[Greg Ip] JAPANESE policymakers must watch Europe’s unfolding train wreck with mixed feelings. On the one hand, they take no joy in the economic and financial damage a vital trading partner is inflicting on itself. On the other hand, for a change they’re not the ones whose judgment is being dissected, debated and criticised.

That changes for one night, however. Tonight in my old stomping ground of Toronto, the following proposition will be debated: “Be it resolved that North America faces a Japan-style era of high unemployment and slow growth.” Paul Krugman and David Rosenberg take the “pro” side, while Larry Summers and Ian Bremmer represent the “con” side.

Japan has been studied so thoroughly that I may subtract rather than add value here. Nonetheless, there are two things I find get less attention than they deserve. They come in the form of a pop quiz:

1.     How much of the gap between Japanese and American economic performance since the mid-1990s can be explained by demographics?

2.     How much did fiscal tightening contribute to Japan’s steep recession of 1998?

The answer to (1) is “more than you think”, and the answer to (2) is “less than you think”. Okay, I don’t really know what you think. Still, when I learned the answers, I was surprised.

First, on demographics. Between 1994 and 2008 American GDP grew 3% a year while Japan’s grew 1.1%. That sounds dismal, but be sure you use the right benchmark. Japan’s potential growth slowed dramatically in the mid 1990s. As the chart at right illustrates, Japan’s working-age population at that time began a long decline, shrinking 0.4% per year over the period while America’s grew 1.2% according to the OECD. That 1.6 point differential can explain most of the difference in growth. Japanese productivity growth averaged a perfectly respectable 2.1% from 1994 to 2008, the same as America’s. At the time it was a disappointment because it was a sharp deceleration from prior decades. In retrospect, though, it may have been inevitable given that Japan had, technologically, almost caught up to America. (An overregulated and inefficient service sector made it difficult to close the remaining gap.)

From Zombie Banks to Zombie Mortgages?

Op-Ed in The Wall Street Journal

• SEPTEMBER 10, 2010

Japan misallocated capital during its lost decade. How the U.S. can avoid its mistakes.

By Greg Ip

Japan’s recent demotion to world’s third-largest economy, behind China, triggered two distinctly different feelings in the United States.

One was Schadenfreude. At the end of the 1980s Japan was a contender for the No. 1 spot. It was the rich world’s fastest growing big country. Its companies dominated electronics, steel, automobiles and even banking. Its political and business leaders were paragons of long-term strategic thinking, while budget and trade surpluses left it rich with cash. Meanwhile, the U.S. was on the brink of recession, its corporate managers obsessed with short-term profits and its politicians incapable of mustering a coherent industrial strategy. “Japan has created a kind of automatic wealth machine, perhaps the first since King Midas,” Clyde Prestowitz wrote in 1988. The U.S. was “a colony-in-the-making.”

What happened next, of course, is history. Japanese property and stock prices cratered, its banking system seized up, and a decade (actually, two now) of economic stagnation followed.

The second feeling Japan’s misfortunes evoked is dread. The U.S. has gone through its own spectacular property crash and banking crisis and is now mired in a painfully weak recovery. Does it face a long period of stagnation as Japan did?

Central banks under fire: Policy punchbags

Jan 14th 2010 | WASHINGTON, DC 
From The Economist print edition

From Argentina to America, politicians are taking aim

Illustration by S. Kambayashi

 

[Greg Ip] RICHARD FISHER, president of the Federal Reserve’s Dallas regional bank, did not hold back. Invoking the hyperinflation of Weimar Germany and Zimbabwe, he warned on January 12th that for Congress to tamper with the Fed’s independence would lead “directly to economic ruin.”

This is hyperbole, to be sure, but the threat of political meddling with independent central banks is genuine, and not just in America.

U.S. Economic Outlook for 2010: Square Root Reversal

Nov 13th 2009
From The World in 2010 print edition
By Greg Ip, WASHINGTON, DC

 

 

America will recover, but too weakly for comfort

The American economy in 2010 will be torn between two opposing forces. The first is that deep recessions usually lead to strong recoveries. The other is that financial crises usually produce weak recoveries. The interplay of these two forces will produce a cycle that resembles not a V, U or W, but a reverse-square-root symbol: an expansion that begins surprisingly briskly, then gives way to a long period of weak growth.

Recessions interrupt the economy’s natural inclination to grow. They create pent-up demand for homes and other goods, and prompt businesses to slash production, payrolls and investment to levels well below what normal sales require. Ordinarily, the deeper the downturn, the more powerful the reversal of those effects. Based on experience, the American economy, which shrank by some 4% over the course of the 2007-09 recession, ought to grow by as much as 8% in its first year of recovery. The unemployment rate, around 10% in late 2009, should drop to about 8%.

That won’t happen. But growth could still beat the consensus forecast of 2.5% in 2010.

Is America repeating Japanese history?

The original post is linked here.

EARLY in his tenure, Tim Geithner, the treasury secretary, promised that American policymakers would not make the same mistakes Japan did in tackling its financial crisis. But as politics threaten to upend his efforts, Mr Geithner should take a second to consider why Japan made its mistakes.

Japanese officials took too long to commit substantial public money to recapitalising their banks. But it was not because they were ignorant of the dangers or Andrew Mellon acolytes hell-bent on liquidating speculators. Like Mr Geithner, they feared being shot down by voters and politicians furious that taxpayers might bail out overpaid bankers.