War without end? Rich countries fire the latest shots in the global "currency war"

Ilene Grabel

I’ve written on a few occasions about the “currency wars” and the divergent responses to its macroeconomic fallout by policymakers across the developing world. (For a primer on the issue, see my earlier posts.) Until recently, the currency war garnered little global attention—likely because of its geography.  The pressures generated by appreciating currencies were largely a problem for rapidly growing developing countries. The currency war was therefore not seen as a “universal” problem that threatened global financial markets, the world economy, or relations among powerful nations. This misguided view obviously failed to acknowledge that any hope for global recovery rests with the continued growth of the larger developing economies. The other factor that kept the currency war off the global agenda was the dismal state of the US and European economies.  Economic stagnation in these countries precluded much attention there to problems abroad that policymakers in the US and Europe could only dream about—too much growth and capital inflows.

But things are changing in ways that make it impossible to ignore the issue for much longer.  While investors remain pessimistic about the prospects of the US and European economies, they are nonetheless moving funds not just to the rapidly growing developing countries but also to wealthy countries, most notably Canada, Switzerland, Australia, New Zealand, and Singapore.  The currencies of these countries are now appreciating dramatically against the euro and the dollar. The Swiss franc reached all-time highs against the US dollar and the euro this year, the Australian dollar has hit three-decade highs against the US dollar, and the Canadian dollar is approaching record levels as well. Among the 16 major currencies in the world, the Swiss franc, New Zealand dollar, Japanese yen, Brazil’s real and Singaporean dollar have gained the most against the US dollar in the past three months.  A Swiss banker put it well last week: “The franc is like the new gold.” As in the developing world, asset bubbles, currency appreciation, inflationary pressures, and risk of a sudden reversal of capital inflows are weighing heavily on policymakers, manufacturers and exporters in a growing number of safe haven countries.

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War without end? Rich countries fire the latest shots in the global “currency war”

Ilene Grabel

I’ve written on a few occasions about the “currency wars” and the divergent responses to its macroeconomic fallout by policymakers across the developing world. (For a primer on the issue, see my earlier posts.) Until recently, the currency war garnered little global attention—likely because of its geography.  The pressures generated by appreciating currencies were largely a problem for rapidly growing developing countries. The currency war was therefore not seen as a “universal” problem that threatened global financial markets, the world economy, or relations among powerful nations. This misguided view obviously failed to acknowledge that any hope for global recovery rests with the continued growth of the larger developing economies. The other factor that kept the currency war off the global agenda was the dismal state of the US and European economies.  Economic stagnation in these countries precluded much attention there to problems abroad that policymakers in the US and Europe could only dream about—too much growth and capital inflows.

But things are changing in ways that make it impossible to ignore the issue for much longer.  While investors remain pessimistic about the prospects of the US and European economies, they are nonetheless moving funds not just to the rapidly growing developing countries but also to wealthy countries, most notably Canada, Switzerland, Australia, New Zealand, and Singapore.  The currencies of these countries are now appreciating dramatically against the euro and the dollar. The Swiss franc reached all-time highs against the US dollar and the euro this year, the Australian dollar has hit three-decade highs against the US dollar, and the Canadian dollar is approaching record levels as well. Among the 16 major currencies in the world, the Swiss franc, New Zealand dollar, Japanese yen, Brazil’s real and Singaporean dollar have gained the most against the US dollar in the past three months.  A Swiss banker put it well last week: “The franc is like the new gold.” As in the developing world, asset bubbles, currency appreciation, inflationary pressures, and risk of a sudden reversal of capital inflows are weighing heavily on policymakers, manufacturers and exporters in a growing number of safe haven countries.

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Keeping Those Food and Agriculture Assistance Promises

Jennifer Clapp

International assistance for food and agriculture has seen a dramatic drop since the late 1980s, with the share of agriculture in ODA and funding for food aid both falling. The food price rises and climbing rates of global hunger that occurred as a result of the 2007-08 food price rises have not yet led to a significant reversal of these trends. The lacklustre global commitment to food and agriculture is disconcerting in a context where food prices have remained high and famine is currently gripping parts of the Horn of Africa.

Agriculture used to have a prominent role in development assistance programs. But according to the OECD, the share of agriculture in official development assistance (ODA) fell from approximately 17 percent in the late 1980s to around 6 percent today, which is up from below 4 percent in 2003.

Recognizing that this level of support for agriculture was unacceptable, the G8 countries and others pledged at the L’Aquila summit in 2009 to mobilize US$20 billion over a three year period for investments in sustainable agricultural development as part of the L’Aquila Food Security Initiative (AFSI). This funding pledge was reiterated by the G20 at Pittsburgh later that year. The G8 and G20 both endorsed the World Bank managed multilateral fund, the Global Agriculture and Food Security Program (GAFSP), as a key channel for these funds. It should be noted that not all of this US$20 billion is new funds over what these donors had already pledged.

Have donors lived up to their commitment for increased agricultural assistance? Two full years later, only US$ 925.2 million has actually been pledged to the GAFSP, and only just over half of that amount was actually received.  And only some US$345 million in project funding decisions have actually been made through this funding window.

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Economics is Always the First Casualty of Politics

Edward Barbier

Both the past wild week of debt negotiations in Congress as well as the debt downgrade of the US by Standard & Poor represents once again the Barbier dictum: Economics is always the first casualty of politics.

In my opinion, the Obama Administration made a fundamental mistake earlier this year in not endorsing the Bowles-Simpson plan on deficit reduction that called for a combination of revenue increases, spending cuts and entitlement and tax reforms as the basis of a plan for deficit reduction over the medium term, while at the same time arguing that there is the need for continued government spending on selected infrastructure and investment opportunities in the short term while continuing to be in recession.  From the beginning of the 2008-9 recession, such short-term government spending needed to be supported by a number of economic incentives and policies to stimulate private sector investment, too.  However, as long as the US economy remains in a recession with lack of consumer or private investment spending, public sector spending in the short term is necessary.  But by adopting the Bowles-Simpson plan immediately, the Obama Administration would have signaled to the markets and the rating agencies that tackling US deficits and debt in the medium and long term, once economic recovery had started in earnest, would be the main priority.

Instead, the last week or two has demonstrated that sound economic policy has been hijacked by an ideological political debate that has focused purely on cutting spending and not managing either the recession or medium-term budget deficits.  Clearly, the Republican Party has been irresponsible in promoting this ideological political stance, and as a consequence, has brought the US economy to the brink.  Although one can agree with US Treasury Secretary Geithner that Standard & Poor is making its decision to downgrade US debt based on political considerations, the wakeup call to US policymakers should not be ignored: stop playing politics with the US and world economy.  This is a message that the Republican leadership in Congress must especially heed.

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The Eurozone at the crossroads

Daniela Schwarzer

It is hardly three weeks ago that the political leaders of the Eurozone decided once more on seemingly far reaching measures to contain the spreading sovereign debt crisis. But within days, the intended effect faded away. Italy and Spain, the 3rd and 4th largest economies of the Eurozone, are on the brink of a situation in which they will not be able to refinance themselves on the financial markets and may have to call on the EU and the IMF to help them out with credits and guarantees.

The yields on Italian and Spanish bonds have almost reached the level of Greece’s, Ireland’s and Portugal’s when they had to start negotiating their rescue programs. Bond yields are in indicator for probable interest rates governments have to expect when they issue new bonds. Interest rates of 6-7 % for ten-year government bonds are widely seen as the upper limit for refinancing costs.

The sovereign debt crisis has hence escalated to a new level for which the Eurozone is not yet prepared. The measures taken by the special summit of July 21 were once again seen by market participants as being too little too late.

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A First Ever Default? Closing the Gold Window, Forty Years On

Gerald Epstein

During the recent “Debt Ceiling” debacle, many warned that the failure to lift the debt ceiling would lead to a “first ever” US default and to numerous financial catastrophes, including the demise of the U.S. dollar as the world’s reserve currency.

“First Ever Default?” Think again.

Forty years ago this month, on August 15, 1971, President Nixon “closed the gold window”, refusing to let foreign central banks redeem their dollars for gold, facilitating  the devaluation of the U.S dollar which had been fixed relative to gold for almost thirty years. While not strictly a default on a US debt obligation, by closing the gold window the US government abrogated a financial commitment it had made to the rest of the world  at the Bretton Woods Conference in 1944  that set up the post-war monetary system. At Bretton Woods, the United States had promised to redeem any and all U.S. dollars held by foreigners – later limited to just foreign central banks — for $35 dollars an ounce. This promise explains why the Bretton Woods monetary system was called a “gold exchange standard” and why many believed the US dollar to be “as good as gold”.  When Nixon refused to let foreign central banks turn in their dollars for gold, and encouraged the devaluation of the dollar which reduced the value of foreign central bank holdings of dollars, the Nixon administration effectively “defaulted” on the United States’ long-standing obligations ending once and for all the Bretton Woods System. (See the useful history by Benjamin Cohen and Fred Block’s masterful history of Bretton Woods, The International Economic Disorder published University of California, Berkley Press.)

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40th Anniversary of the end of Bretton Woods

Kevin P. Gallagher

Forty years ago today the United States ended the Bretton Woods International Monetary System.  This video shows then US President Richard Nixon making the announcement to the world:

No longer were fixed exchange rates the norm for the global economy.  Floating rates prevailed, and it was hoped that financial and currency markets would become more stable.  That has not been the case.  As we move into the fourth year of the global financial crisis a number of scholars and policy-makers have called for a new international monetary system.  Some call for a new global reserve system based on Special Drawing Rights, others call for a global GDP-linked bond, and others such as Ron Paul and Robert Zoellick long for those days of the gold standard.

What are your thoughts on this 40th anniversary of such a transformative event?  Where do we go now?

Reframing Development in the Age of Vulnerability

Robin Broad and John Cavanagh*, guest bloggers

The contemporary triple crises of finance, development, and environment, which have shaken the global economy since 2008, have exposed what should be seen as the Achilles heel of the dominant development theory and practice of the past thirty years: vulnerability.  The crises not only add momentum to the delegitimization of the old model, but also offer legitimacy for paths that lessen vulnerability and increase what we term “rootedness” – a term we prefer to “resilience” and “sustainability”.

Over this past year, the two of us have traveled and looked into the many different factors that make countries more or less rooted in this age of economic, environmental and social vulnerability.  Our first academic article from this research (from which this blog is drawn) was just published in Third World Quarterly.  The article moves from development in theory and practice, to case studies, and then offers 13 such measures with appeals to United Nations’ agencies and governments to start measuring them.

To cull key points for this Triple Crisis audience: Prior to the late 1990s, proponents of the “neoliberal” model ignored the fact that market-opening policies might leave countries tragically vulnerable to external shocks.  But, such shocks did appear.  A financial crisis that started in Thailand in 1997 spread around the world in what became known as the Asian financial crisis.  Then, a decade later, the year 2008 became a perfect storm of deleterious impacts of the vulnerability path: A global food price crisis erupted at the beginning of the year.  Another global finance crisis spread around the globe in September and October.  And environmental crises of climate, water and biodiversity shook the world.

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Another Famine in the Horn of Africa: Putting Hunger in Context

Ali Kadri

By 2002, five years after the World Food Summit, the FAO reported that it was not possible to meet the objective of halving the numbers of the world hungry and eliminate its more extreme manifestations in starvations and famines by 2015. In 2002, basic food prices had fallen to two-thirds the level at which they were five years earlier. That was a time when food was cheap.

In 2002, declining basic food production per capita and a higher frequency of production shortfalls in poorer food-importing countries represented the hollow reasons as to why the human-right to food was not going to be met. Accompanying the quantitative trend, rising basic food imports per capita added to an already asphyxiating Least Developing Countries debt burden. Responding to this, the World Bank, the IMF, and the WTO contemplated setting up a financial institution that would lend to poorer countries at concessional interest rates so that they could offset hunger or, its extreme manifestation in famine, with adequate food imports.

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S&P Downgrade Brought on by Republican Obstructionism

Jeff Madrick

There are lessons to be learned from S&P’s report, but none of them are financial.

Does anyone really think that Standard & Poor’s downgrade of U.S. debt would have occurred unless there had been the Congressional stand-off on raising the debt ceiling? For all of S&P’s handwringing about the nation’s debt problems, Congressional recalcitrance was the driving issue. So when the press says neither the Democrats nor the Republicans can escape blame, it is in truth nonsense. The showdown caused the downgrade, not the nation’s financial liabilities, and Republicans deliberately caused it in pursuit of their own political and ideological goals.

Of all the silly comments about the Standard & Poor’s downgrade of U.S. debt, those of Senator Lindsey Graham might take the cake. He said any CEO would have to quit if his or her company’s debt was downgraded. But Graham does not realize that private corporations are essentially dictatorships, only occasionally beholden to shareholders. President Obama has to deal with the deliberately obstructionist Congress led by Graham’s party. Republicans could have lifted the debt ceiling and still fought for their case. Instead, they played chicken with U.S. credit in the name of ideology — or, more likely, to target the President.

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