antique currency

Nothing Worse Than A Sore Winner

Increasingly, we are hearing reports that the United States, championed by Treasury Secretary Tim Geithner, is demanding that the International Monetary Fund (IMF) increase its monitoring of intervention in currency markets. This is, put very simply, a trick question.

Currently, the markets are filled with speculation that the Federal Reserve will engage in quantitative easing, which can be translated for the uninitiated as printing money to stimulate the U.S. economy. This is not printing physical money, but that isn’t important; this is money that exists on paper, or more precisely, in the electronic records of the Federal Reserve banking system and the privately owned banks of the United States of America. This, too, is not important. It’s printing money in the sense that it is adding to the total quantity of money in the banking system. That’s why it is quantitative easing.

As a rather simple consequence of the number of U.S. dollars increasing, the U.S. dollar’s value will be eroded. The markets cannot fail to notice the consequence: the U.S. dollar must necessarily fall.

However, the U.S. would be devaluing its currency without technically intervening in the currency markets whatsoever.

What has both the U.S. and China smoking from out of their ears in the current high level financial talks is that Japan recently intervened in currency markets when its yen appreciated to 82 cents to the U.S. dollar, its highest position in a decade and a half. This is the sort of thing that Japan has done as a defensive measure over the years. It’s quite normal for the Ministry of Finance.

It’s completely typical for China to complain; after all, what’s the point of keeping an artificially low yuan if other countries get to intervene in the market to make your advantage a little less advantageous.

It’s not typical for the U.S. to pile on, and then, to tattle to the world’s finance ministers and try to get the IMF to play referee to keep the other children in line.

Indeed, China doesn’t seem to want the IMF to do the kind of “monitoring” that the U.S. wants, since monitoring would “largely exempt developed countries.” Well, it’s actually quite a bit more specific than that; the U.S. wants such monitoring to put more pressure on China to stop using the proceeds of its trade surplus to intervene in the currency markets and keep its yuan low relative to other currencies, but chiefly, relative to the U.S. dollar.

Even more than that, simply printing more money is not “currency intervention” per se, so an argument can easily be made that U.S. Federal Reserve quantitative easing would be outside the jurisdiction of the IMF even if monitoring of “currency intervention” is greatly increased.

In other words, the U.S. wants to be able to print money and have countries like Japan and Germany accept it with good grace.

Show Some Dignity

It’s not so much that this would be a new thing; the U.S. has done quite a lot of “temporary” expansion of the money supply before. Wonder why the U.S. dollar keeps staying under pressure relative to the yen and the Euro (except for when Europe had its own crisis with Southern European debt)? It’s because there are effectively more U.S. dollars available for lending into the real economy, therefore, there is a de facto devaluation without any market manipulation.

In other words, the U.S. wants the IMF to shut the barn door after the American horse has bolted the stables, to keep all the other horses inside. (Aside from China’s, which the American horse will now pursue.)

In still other words, the U.S. wants to halt the currency war it began with an unconditional unilateral disarmament by all other major economies (including China if the U.S. could force it to agree) so that the U.S. can win by default.

This message essentially has a “we can, you can’t” vibe that, put really bluntly, really annoys the rest of the civilized world.

So Stop Complaining

So whining that the U.S. can beggar thy neighbor but others can’t is really unbecoming. It isn’t dignified at all. It reeks of having started a war you can’t finish.

China knows this, and it’s not being nice or gentle about twisting the knife.

The problem has more to do with the other major economies like Japan, Germany, and even down to leading emerging economies like Brazil. The U.S.’ quantitative easing may be the Obama administration’s hope for a better domestic economy, and therefore, a better political situation, but it is deeply unwelcome to other economies. After all, the U.S. dollar is still the primary global reserve currency, the lingua franca of commerce, even after all that has happened.

If Japan and Germany are led to believe that the purpose of IMF monitoring is not just to keep China in line, but to prevent them from delaying a further imbalance between their currencies and that of the United States, and therefore deny them the opportunity to at least maintain equilibrium, there’s very little chance that they’ll agree to this, to say the least. (And this time, at least, they did not.)

Whatever happened to keep your friends close, but keep your enemies closer? This is pushing your friends into becoming hostile, and so far as I can tell, it will have an upside of precisely zero. To say nothing of making your “enemy” all that more eager to defeat your transparent agenda.


A currency war by any other name is still a currency war.

Changing the rules mid-battle won’t impress your competitors.

Don’t start a war you can’t finish.