In These New Times

U.S. urged to have its own house “clean-up” first
October 21, 2010
Peoples Daily

“The dollar is ours but the problem is yours,” said the former US Treasury Secretary John Connelly in the 70s of the 20th century, which became a popular dictum spreading far and wide. To date, not only Europe and many countries on earth have in fact felt the pain of the plunging dollar.

US Federal Reserve Chairman Ben Bernake made it clear on Oct. 15 that the U.S. Central Bank was prepared to take additional steps to bolster economic growth, as if giving the green light to the second round of the quantitative relaxation policy. Bernake, though having not elaborated it clearly, has exactly the same implication as Connelly’s famous saying some four decades ago, said the Wall Street Journal in a commentary.

As a main reserve currency issuer in the world, the United States has intervened in exchange rates with varied means, by lowering the benchmark interest rate and influencing the bond market trading, influencing money supply to affect the dollar exchange rate, which is also the Fed’s policy move taken after the eruption of financial crisis. In order to help economy and stimulate U.S. exports, the Fed has since 2008 adopted a proactive monetary policy with both conventional and unconventional means, and thrown into the market with plenty of cheap dollars. With the exception for a period of European sovereign debt crisis, the US dollar has basically been in a depreciation trend.

Of late, as signs become increasingly for the Fed’s restart of the quantitative relaxation policy, the dollar fell a new low against the currencies of various countries, causing many of them to take self-protection measures to curb currency appreciation pressure, so as to attain their purpose of ensuring their export competitiveness.

However, the U.S. trade deficit is on steady rise, and it shows the dollar devaluation does not boost U.S. exports, but only increase risks for the “currency war” with major trading partners. Ace economist Stieglitz insisted that the U.S. attempt to ease monetary policy to save U.S. economy has interfered with global currency market.

Faced with fluctuations on global foreign exchange market, the United States does have feelings of concern for the “currency war”. Nevertheless, it blindly blamed the RMB undervaluation for global economic imbalance and the loss of U.S. job opportunities at home. Fred Bergsten, director of the Peterson Institute for International Economics (PIIE), who endorses this viewpoint, has been appointed by President Barack Obama to the Advisory Committee for Trade Policy and Negotiations (ACTPN), even slammed the undervaluation of RMB currency as an underlying cause of confusion on the exchange market. ACTPN is a private, non-profit and nonpartisan research institute devoted to the study of international economic policies.

Fred Bergsten also regarded that the use of exchange rate adjustment to cope with the U.S. trade imbalance is only a complementary tool and, what more important is for the U.S. to take action to correct the fiscal deficit. At the same time, he added, China’s domestic consumption expansion and integration of huge finances and monetary policy have already been doing such work. Moreover, he said, China needs not to worry about the economic impact of drastic currency appreciation.

Thomas, M.T. Niles, former president of the United States Council for International Business, however, does not favor Bergsten’s view. He maintained that the main problem does not rest with China, but on the part of the U.S. The deficit itself is a response from the U.S.’ own economic performance and the result of the very low U.S. saving rate. Even if the RMB appreciates by additional 20 percent, the impact on American economy is relatively small and job opportunities will not return to the U.S.; Chinese people are aware of it, and have repeatedly reminded the U.S. of re-balancing its economy.

Only with its own house “clean-up” to resolve its longstanding deficit problem, can the U.S, have credibility in resolving global issues, note Washing Post in a recent commenter’s article.

The RMB revaluation should not be covered by other governments as a fig leaf for their problems, and it is always easy to find a “scapegoat”, said Strauss-Kahn, a former French finance minister who took over head of the International Monetary Fund (IMF), at the recent annual Autumn World Bank-IMF Meetings.

Many are worried that if the present competitive currency depreciation practices are not curbed, the “currency war” could turn into the “trade war” as during the Great Depression in the 30s of the 20th century to spur the introduction of a range of measures to restrict imports of goods, and the outcome is to deepen the global recession instead. Meanwhile, James Lilley, director of the Brookings Institution China Center, noted that the “currency war” is a race towards the bottom, in which no one benefit and each nation is a loser, and so the “currency war” is very stupid.

According to a China economist and U.S. Atlantic Council senior fellow, the “currency war” cannot happen, and the current situation is owed to the political climate in the U.S. mid-term elections. The RMB exchange rate is essentially a political issue rather than an economic issue, he acknowledged, and as long as the import growth rate exceeds the export growth rate and trade balance policy is carried out, the pressure on RMB can gradually ease.

What worth mentioning here is that IMF and World Bank leaders have avoided using the term “currency war” and emphasize more on international cooperation to cope with challenges to global economic recovery. Many analysts believe that countries should reach a compromise so as to avert the “currency war” and the “trade war”.

By People’s Daily Online and its author is PD resident reporter in U.S. Ma Xiaoning