Feedback Loops
Michael Pettis | Apr 29, 2013 08:25AM ET
Early this month Martin Wolf had another of his very interesting article in the South China Morning Post:
Many of China’s top economists are livid at what they view as an effective currency devaluation by Japan and are calling on the People’s Bank of China to retaliate by weakening the yuan to defend itself in what they see as a new currency war. These economists, including Tsinghua University professor Li Daokui and ANZ Bank’s Liu Ligang, see Japan’s plan to double its monetary base within two years as “blackmail” and have criticised the Japanese central bank’s decision to open the liquidity floodgates to bump up the economy.
Liu said Japan’s unprecedented easing programme, aimed at ending more than two decades of deflation, was “a monetary blackmail” targeted at other export-driven Asian countries such as China and that the central bank should sell more yuan and buy the US dollar to push down the yuan. He also called on authorities to guard against a fresh wave of hot money into China’s fragile financial markets, warning that Japan’s move would reignite the so-called carry trade, under which investors borrow in low-interest yen and invest in high- interest markets.
It is interesting that while Beijing has complained bitterly about the exorbitant privilege that allows the US to exploit foreign purchase of dollars for reserves, when Tokyo acts to push down the yen, many of the same people in Beijing argue that the Chinese response should be to transfer to the US even more of this exorbitant privilege. It seems that none of the world’s economies really want to take any of the exorbitant privilege for themselves.
And why should they? Buying US dollars in order to push down the value of their currencies – and this is all the US exorbitant privilege consists of – allows other countries to increase domestic employment by turbo-charging exports growth at the expense of domestic consumption (and imports). Although countries that do this usually insist that this higher domestic employment does not come at the expense of US employment, no one is eager to carry the current account deficit that comes with the exorbitant privilege.
My guess is that until the US takes steps to prevent foreign accumulation of US government bonds, or, if other countries want to retain the use of an international traded currency, they agree not to game the reserve system, the US will always be faced with the choice either of absorbing demand deficiency from every part of the world that wants more growth or of engaging in its own version of currency war, QE. The very same people who complain about the currency consequences of QE, in other words, are arguing that while it makes sense for them to expand aggressively, it is morally wrong when other countries do it.
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That sounds a lot to me like old-fashioned beggar-thy-neighbor politics. And there is no reason we should expect this to end soon.
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