The return of the currency wars?

The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way. The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world.Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies – or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating.


All of this will lead to a strengthening of the US dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year. But, if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation.


The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth. Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth. Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and thus private consumption.


In the eurozone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the European Union, the International Monetary Fund, and the ECB have been a massive impediment to growth. In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year. In the US, a budget sequester and other tax and spending policies led to a sharp fiscal drag in 2012-2014. And in the United Kingdom, self-imposed fiscal consolidation weakened growth until this year.


Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral. Countries that were overspending, under-saving, and running current-account deficits have been forced by markets to spend less and save more. Not surprisingly, their trade deficits have been shrinking. But most countries that were over-saving and under-spending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and thus undermining growth.


As fiscal austerity and asymmetric adjustment have taken their toll on economic performance, monetary policy has borne the burden of supporting faltering growth via weaker currencies and higher net exports. But the resulting currency wars are partly a zero-sum game: If one currency is weaker, another currency must be stronger; and if one country’s trade balance improves, another’s must worsen.


Of course, monetary easing is not purely zero-sum. Easing can boost growth by lifting asset prices (equities and housing), reducing private and public borrowing costs, and limiting the risk of a fall in actual and expected inflation. Given fiscal drag and private deleveraging, lack of sufficient monetary easing in recent years would have led to double and triple dip recession (as occurred, for example, in the eurozone).


But the overall policy mix has been sub-optimal, with too much front-loaded fiscal consolidation and too much unconventional monetary policy (which has become less effective over time). A better approach in advanced economies would have comprised less fiscal consolidation in the short run and more investment in productive infrastructure, combined with a more credible commitment to medium- and long-term fiscal adjustment – and less aggressive monetary easing.


You can lead a horse to liquidity, but you can’t make it drink. In a world where private aggregate demand is weak and unconventional monetary policy eventually becomes like pushing on a string, the case for slower fiscal consolidation and productive public infrastructure spending is compelling.


Such spending offers returns that are certainly higher than the low interest rates that most advanced economies face today, and infrastructure needs are massive in both advanced and emerging economies (with the exception of China, which has overinvested in infrastructure). Moreover, public investment works on both the demand and supply sides. It not only boosts aggregate demand directly; it also expands potential output by increasing the stock of productivity-boosting capital.


Unfortunately, the political economy of austerity has led to sub-optimal outcomes. In a fiscal crunch, the first spending cuts hit productive public investments, because governments prefer to protect current – and often inefficient – spending on public-sector jobs and transfer payments to the private sector. As a result, the global recovery remains anemic in most advanced economies (with the partial exception of the US and the UK) and now also in the major emerging countries, where growth has slowed sharply in the last two years.


The right policies – less fiscal austerity in the short run, more public investment spending, and less reliance on monetary easing – are the opposite of those that have been pursued by the world’s major economies. No wonder global growth keeps on disappointing. In a sense, we are all Japanese now.


Source: World Economic Forump, published in collaboration with Project Syndicate

Author: Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration.


Posted by Nouriel Roubini – 03:27

All opinions expressed are those of the author. The World Economic Forum Blog is an independent and neutral platform dedicated to generating debate around the key topics that shape global, regional and industry agendas.

Posted by Jesus David Cano Romano

10 Books for Understanding China’s Economy

Based on the list published by The Diplomat here’s the 10 must to read books in order to understand the Chinese Economy:


1 – Avoiding the Fall – Michael Pettis.

Despite a faulty narrative of Peking University’s Michael Pettis being a “China Bear,” this book, like his popular blog, is not a scare story. Having been vindicated by unfolding events, Pettis’s previous predictions of growth falling (it already has) and reform becoming urgent (China’s leaders seem to agree) and debt building up unsustainably (it has been) leave this book as a key read for those seeking to understand the reform process in China. The book addresses the questions: What has been happening? What needs to change? What happens if it doesn’t change?


2 – China’s Superbank – Henry Sanderson & Michael Forsythe

Michael Forsythe’s recent fallout with Bloomberg over alleged censorship of a story embarrassed the NY-based news and financial information company. Judging by the detail and professionalism evident in this book, Bloomberg was foolish to lose him. Forsythe and Sanderson go further than just explaining the activities of the gigantic China Development Bank. The book also reveals a lot about China’s growth model, overseas resource acquisition strategies, and some international political risk profile problems that China’s investments might face.


3 – Red Capitalism – Walter & Howie

Walter and Howie’s book, when published in 2011, created quite a stir for being one of the first English language volumes to actually explain many of the more complicated aspects of China’s financial system – in particular how local government financing platforms were being established and capitalized, and the characteristics of the bond market. The book also examines the debt build up in China’s economy.


4 – Inside China’s Shadow Banking: The Next Subprime Crisis? – Joe Zhang

Joe Zhang’s personal hands-on experience in China’s finance system (both at the People’s Bank of China, UBS and in microfinance) gives him an interesting perspective on China’s shadow banking system. The book came out just as worries about shadow finance were increasing and is thus a must read for those interested in the sector.


5 – The Great Rebalancing – Michael Pettis

Michael Pettis’s second book was reviewed on Pacific Money last year. A brilliant explanation of the global trade system, and how domestic policies affect the international outlook.


6 – Factions and Finance in China – Victor Shih

A pretty technical book that delves into the mysteries of China’s financial developments throughout the 1980s and 1990s, Factions in Finance is a fascinating look at how politics can affect finance and how finance can affect politics.


7 – In Line Behind a Billion People– Ma & Adams

It has been a trend in recent decades to try and separate economics from political and social realities, so it is useful that Damien Ma and William Adams approach China through economic, political, and social lenses as they consider how scarcity will “define China’s ascent.”


8 – Tiger Head, Snake Tails – Jonathan Fenby

Jonathan Fenby’s broad look at China contains some interesting insights into the wider picture – including social, environmental and political factors facing China today. It doesn’t take too much extrapolation to link nearly all these factors to the economy.


9 – The China Price – Alexandra Harney

Getting right down to the human face of China’s growth miracle, Harney‘s book serves as a fascinating reminder that GDP figures, export numbers and other headline statistics stand atop a pyramid of human toil.


10 – Uprising – George Magnus

George Magnus’s (of UBS fame) book was originally published in 2011, and focuses on the problems facing emerging markets as they move up the growth pyramid. Aging populations and a lack of innovation are highlighted among key problems that must be tackled, and Magnus stresses how some fixes require institutional and political changes that will not be easy.

Posted by Jesus David Cano Romano

China is the new World Largest Economy

Measuring gross domestic product using purchasing power parity (PPPs) the International Monetary Fund now estimates China’s GDP at $17.6tn, against the US’s $17.4tn.
PPPs are an attempt – far from perfect – to account for varying price levels between countries, particularly in goods and services not open to international competition. PPPs make a big difference. According to the IMF, China’s GDP this year measured in simple dollars, making no adjustment for relative prices, is $10.4tn.
Notwithstanding any measurement problems, China’s rise has been remarkable.
In 1980 Chinese economic output was a tenth of the US. Four decades on, the IMF estimates that China’s economy will be 20 per cent larger than the US.
China’s average growth in GDP from 1980 to this year has been an astonishing 9.8 per cent per year, compared with 2.7 per cent in the US. Sustained annual growth of 10 per cent implies that an economy will double in size roughly every seven years
Two caveats: Firstly, China’s economy may now be the largest in the world but it is far from the richest. GDP per head is still less than a quarter of US levels.
Secondly, in a long-run historical perspective, China’s rise has merely restored the status quo ante. Angus Maddison, doyen of economic historians, estimated that China was the world’s largest economy as late as 1870, with India close behind. The 150-year dominance of Europe and the US has been the exception.

Posted by Jesus David Cano Romano