IMF meeting fails to address currency problems
The annual meeting of the International Monetary Fund was a dismal affair. Ministers arrived in Washington with the global economy drifting towards a currency war and they left town having done nothing to stop hostilities breaking out. The co-operation that was so evident in October 2008, when the banks were falling like ninepins, was nowhere to be seen.
Interesting article on the currency problems facing the US and the slow drift towards a global currency war. I've been noticing this for some time now, everybody wants to export their way out of the current economic slump, and that means keeping a low currency exchange rate. Obviously not everybody can keep their currency low at the same time, and countries are having to take more aggressive and expensive routes to keep it down. Nobody wants to be seen as waging a currency war though, so nobody talks about it that way.
There is also some good historical perspective on how and why we have the current global currency system.
It seems that policymakers cope well with a crisis but find it hard to agree once the immediate threat has gone away. The brutal reality of this year's gathering was that structural flaws in the system of global economic governance mean little can be done to resolve the dispute between the US and China.
There is another big factor here. With the banking crisis of the last few years everybody was on the same side. The amount of pain varied from country to country, but nobody wanted the banking system to collapse. The currency situation is different, everybody is in it for themselves.
Indeed, the Americans are probably closer to pushing the nuclear button than they were before the weekend. The jobs figures highlighted the fragility of the economy, while the IMF meeting highlighted the impotence of the multilateral system. If, as seems apparent, the world can only pull together in a crisis, America and China between them may be about to provide one.
I think they are right. The economy is going sideways, and the job market is not getting better. We can continue to borrow enough to keep the country functional, but there is some limit to that and hitting that limit would be a disaster.
At some point we need to begin a real realignment of currency with China, or we start a currency/trade war or we borrow till we can't borrow any more and the economy crashes hard. The first would be the best solution, but we are at least going to have to threaten the second to get China to move and the second is preferable to the third.
Jay