Oct 15th 2010

Only the Weak Survive

by Nouriel Roubini

 

Nouriel Roubini is CEO of Roubini Macro Associates and Professor of Economics at the Stern School of Business, New York University.

TOKYO - The risk of global currency and trade wars is rising, with most economies now engaged in competitive devaluations. All are playing a game that some must lose.

Today's tensions are rooted in paralysis on global rebalancing. Over-spending countries - such as the United States and other "Anglo-Saxon" economies - that were over-leveraged and running current-account deficits now must save more and spend less on domestic demand. To maintain growth, they need a nominal and real depreciation of their currency to reduce their trade deficits. But over-saving countries - such as China, Japan, and Germany - that were running current-account surpluses are resisting their currencies' nominal appreciation. A higher exchange rate would reduce their current-account surpluses, because they are unable or unwilling to reduce their savings and sustain growth through higher spending on domestic consumption.

Within the eurozone, this problem is exacerbated by the fact that Germany, with its large surpluses, can live with a stronger euro, whereas the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) cannot. On the contrary, with their large external deficits, the PIIGS need a sharp depreciation to restore growth as they implement painful fiscal and other structural reforms.

A world where over-spending countries need to reduce domestic demand and boost net exports, while over-saving countries are unwilling to reduce their reliance on export-led growth, is a world where currency tensions must inevitably come to a boil. Aside from the eurozone, the US, Japan, and the United Kingdom all need a weaker currency. Even Switzerland is intervening to weaken the franc.

Meanwhile, China is intervening massively to resist appreciation of the renminbi and thus maintain its export performance. As a result, most emerging-market economies are now similarly worried about currency appreciation, lest they lose competitiveness relative to China, and are intervening aggressively and/or imposing capital controls to stem upward exchange-rate pressure.

The trouble, of course, is that not all currencies can be weak at the same time: if one is weaker, another must, by definition, be stronger. Likewise, not all economies can improve net exports at the same time: the global total is, by definition, equal to zero. So the competitive devaluation war in which we find ourselves is a zero-sum game: one country's gain is some other country's loss.

The first salvos in this war came in the form foreign-exchange intervention. To diversify away from US dollar assets while maintaining its effective dollar peg, China started to buy Japanese yen and South Korean won, hurting their competitiveness. So the Japanese started to intervene to weaken the yen.

This intervention upset the EU, as it has put upward pressure on the euro at a time when the European Central Bank has placed interest rates on hold while the Bank of Japan (BoJ) and the US Federal Reserve are easing monetary policy further. The euro's rise will soon cause massive pain to the PIIGS, whose recessions will deepen, causing their sovereign risk to rise. The Europeans have thus already started verbal currency intervention and may soon be forced to make it formal.

In the US, influential voices are proposing that the authorities respond to China's massive accumulation of dollar reserves by selling an equivalent amount of dollars and buying an equivalent amount of renminbi. Meanwhile, China and most emerging markets are accelerating their currency interventions to prevent more appreciation.

The next stage of these wars is more quantitative easing, or QE2. The BoJ has already announced it, the Bank of England (BoE) is likely to do so soon, and the Fed will certainly announce it at its November meeting. In principle, there is little difference between monetary easing - lower policy rates or more QE - that leads to currency weakening and direct intervention in currency markets to achieve the same goal. In fact, quantitative easing is a more effective tool to weaken a currency, as foreign exchange intervention is usually sterilized.

Expectations of aggressive QE by the Fed have already weakened the dollar and raised serious concerns in Europe, emerging markets, and Japan. Indeed, though the US pretends not to intervene to weaken the dollar, it is actively doing precisely that via more QE.

The BoJ and the BoE are following suit, putting even more pressure on the eurozone, where a stubborn ECB would rather kill any chance of recovery for the PIIGS than do more QE, ostensibly owing to fears of a rise in inflation. But that is a phantom risk, because it is the risk of deflation, not inflation, that haunts the PIIGS.

Currency wars eventually lead to trade wars, as the recent US congressional threat against China shows. With US unemployment and Chinese growth both at almost 10%, the only mystery is that the drums of trade war are not louder than they are.

If China, emerging markets, and other surplus countries prevent nominal currency appreciation via intervention - and prevent real appreciation via sterilization of such intervention - the only way deficit countries can achieve real depreciation is via deflation. That will lead to double-dip recession, even larger fiscal deficits, and runaway debt.

If nominal and real depreciation (appreciation) of the deficit (surplus) countries fails to occur, the deficit countries' falling domestic demand and the surplus countries' failure to reduce savings and increase consumption will lead to a global shortfall in aggregate demand in the face of a capacity glut. This will fuel more global deflation and private and public debt defaults in debtor countries, which will ultimately undermine creditor countries' growth and wealth.


Nouriel Roubini is Chairman of Roubini Global Economics (www.roubini.com), Professor at the Stern School of Business at NYU, and co-author of Crisis Economics.

Copyright: Project Syndicate, 2010.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

May 24th 2019
Waging a war against Iran, or even thinking of doing so, is sheer madness. Trump has thus far wisely rejected the warmonger National Security Advisor John Bolton’s outrageous advice. Waging another war in the Mideast, this time against Iran, would have not only disastrous consequences for the US but will also engulf our allies from which they would suffer incalculable human losses and destruction. Bolton was the architect behind the devastating war in Iraq in 2003, which inflicted more than 5,000 US casualties and a cost exceeding two trillion dollars, allowed Iran to entrench itself in Iraq, and gave way to the rise of ISIS.
May 24th 2019
The private Tasnim news agency reports from Iran that in a speech to thousands of university students, Iran’s clerical leader Ali Khamenei made an unusual and extraordinary criticism of president Hassan Rouhani and foreign minister Mohammad Javad Zarif over their handling of the 2015 Joint Comprehensive Plan of Action or deal on limiting Iran’s nuclear enrichment program.
May 21st 2019
Extract: "Brexit, after all, is as much a Kremlin project as it is anyone else’s. Putin wants to divide Europeans, and in the UK, Brexit has succeeded in dividing Britons like nothing since the Corn Law debates almost 200 years ago. Putin wants the EU to fragment, and Brexit is causing the biggest crack yet in the bloc’s history. Putin wants to sow doubt about the legitimacy of traditional news sources; pro-Brexit media consistently promote lies as truth and inveigh against reputable papers like the Financial Times as elitist enemies of the people."
May 16th 2019
Iraq’s population when invaded was 26 million. Iran’s population today is 81 million..........Whereas Iraq’s neighbors– Turkey, Iran and Saudi Arabia in particular– had been mauled by Saddam and so did not strongly oppose Bush’s invasion, Shiite Iraqis, many Syrians, the Hazaras of Afghanistan, and the some 40 million Shiites of Pakistan would support Iran.
May 15th 2019
It’s time that economists, pundits, and politicians start looking holistically at life in our times, and take seriously the long-term structural changes needed to address the multiple crises of health care, despair, inequality, and stress in the US and many other countries. US citizens, in particular, should reflect on the fact that many other countries’ people are happier and less worried, and are living longer. In general, those other countries’ governments are not cutting taxes for the rich and slashing services for the rest. They are attending to the common good, instead of catering to the rich while pointing to illusory economic statistics that hide as much as they reveal.
May 8th 2019
"........Meanwhile, Trump is leaving the door open for Russia to come to his aid again in 2020. The White House and congressional Republican leaders have been blocking a bill to secure US elections against foreign attacks. And administration officials have been instructed not to raise the issue of Russian interference with the president, lest it cast a shadow on his legitimacy.  The next phase in this affair is already coming into focus. Barr, with the help of Trump’s golfing buddy Lindsey Graham, the Republican chair of the Senate Judiciary Committee, is now enlisted in peddling the president’s fantasy that the Mueller investigation was a “witch hunt” orchestrated by “deep-state” supporters of Hillary Clinton. Once again, current and former FBI agents will be targeted, either because they expressed criticism of Trump or because they opened a national security investigation into a hostile power’s meddling in the US presidential election (which continued in the 2018 midterms). FBI director Christopher Wray, commenting on the Mueller report, said that the Russians are “upping their game” for 2020. "
May 7th 2019
We are witnessing the loss of biodiversity at rates never before seen in human history. Nearly a million species face extinction if we do not fundamentally change our relationship with the natural world, according to the world’s largest assessment of biodiversity.
May 4th 2019
Accusing Iran of being a rogue country bent on acquiring nuclear weapons, supporting extremist groups and terrorism, persistently threatening Israel, and destabilizing the region in its relentless effort to become the dominant power may well all be justified. The question is, what would it take to stop Iran from its destabilizing activities and help make it a constructive member of the international community, and avoid military confrontation with either the US or Israel or both?
Apr 29th 2019
Some of the most famous scientific discoveries happened by accident. From Teflon and the microwave oven to penicillin, scientists trying to solve a problem sometimes find unexpected things. This is exactly how we created phosphorene nanoribbons – a material made from one of the universe’s basic building blocks, but that has the potential to revolutionise a wide range of technologies.
Apr 28th 2019
Easter visitors to London have found some streets and buildings occupied by “Extinction Rebellion” activists, warning of climate catastrophe and rejecting “a failed capitalist system.” Followers of central bank thinking have seen the governors of the Bank of England and Banque de France warning that climate-related risks threaten company profits and financial stability. Both interventions highlight the severity of the climate challenge that the world faces. But warnings alone won’t fix the problem unless governments set ambitious but realistic targets to eliminate carbon dioxide and other greenhouse-gas emissions, backed by policies to ensure the targets are achieved. Zero net CO2 emissions by 2050 at the latest should be the legally defined objective in all developed economies.
Apr 25th 2019
LONDON – Russian efforts to influence European elections have received plenty of media attention. But the same cannot be said of interference by conservative Christian groups based in the United States, some with links to President Donald Trump’s administration and his former adviser, Stephen Bannon.
Apr 24th 2019
.............the version of the report released is only the start of wide-ranging and intensive House investigations.
Apr 17th 2019
On the night of April 15, 2019, in Paris, the emotions were raw. “Notre Dame is burning, the whole of France is crying, the whole world is crying,” said Archbishop Michel Aupetit of Paris. “It’s terrible, frightening, painful, a tragedy, a nightmare.” “This place leaves no one untouched. When you enter this cathedral, it inhabits you,” said Anne Hidalgo, the Mayor of Paris, in front of the burning monument. “We will rebuild,” said the Rector of Notre Dame, “we will rebuild.”
Apr 15th 2019
High-level political purges are gathering pace in Russia. The latest evidence came in late March, with the arrests of Mikhail Abyzov, a former minister for open government affairs, and – two days later – Viktor Ishayev, a former Far East minister and ex-governor of Russia’s Khabarovsk region. Unsurprisingly, the arrests of such senior figures is having a chilling effect among the country’s elites. The authorities have now arrested or imprisoned three former federal government ministers and a supporting cast of regional officials
Apr 8th 2019
The reaction to this type of paternalism, sensible and well-meant as it usually was, came in the form of petulant populism. Like a child who refuses to eat his spinach, just because his mother claims it is good for him, supporters of Trump, Brexiteers, or Baudet want to give the finger to the politics of virtue. That is why Nigel Farage, the chief promoter of Brexit, likes to be photographed with a glass full of beer and a smoldering cigarette: if the virtuous elite want us to drink less and quit smoking, let’s have another and light up.
Apr 8th 2019
Chinese President Xi Jinping seems to be on a roll. He has sent a rocket to the dark side of the moon, built artificial islands on contested reefs in the South China Sea, and recently enticed Italy to break ranks with its European partners and sign on to China’s Belt and Road Initiative. Meanwhile, US President Donald Trump’s unilateralist posture has reduced America’s soft power and influence. China’s economic performance over the past four decades has been truly impressive. It is now the main trading partner for more than a hundred countries compared to about half that number for the United States. Its economic growth has slowed, but its official 6% annual rate is more than twice the American rate. Conventional wisdom projects that China’s economy will surpass that of the US in size in the coming decade. Perhaps. But it is also possible that Xi has feet of clay.
Apr 2nd 2019
"......as prime minister, May called a snap election in the name of helping her deliver Brexit. She openly dismissed anyone opposing Brexit – which at the very least meant the 16.5m who had voted remain – as “playing games with politics”. In hock to the hardline Brexiteers within her own party, May pushed a for a version of Brexit that would make this small group of around 100 or so individuals happy, regardless of what millions out in the country thought."
Apr 1st 2019
The financial crisis occurred in 2008 because deficient regulation allowed huge risks to develop within the financial system itself. But the depth of the subsequent recession, and the long period of slow growth that followed, was the result not of continued financial system fragility, but of the excessive leverage in the real economy that had developed over the previous half-century. Between 1950 and 2007, advanced economies’ private-sector debt (households and companies) grew from 50% to 170% of GDP and adequate growth seemed attainable only if debt grew far more rapidly than nominal GDP. After the crisis, loan growth turned negative and remained depressed for many years, not because an impaired financial system lacked the capital to extend credit, but because overleveraged households and companies were determined to pay down debt even if interest rates were zero. The same pattern was observed in Japan in the 1990s.
Mar 28th 2019
The American people should have known that something was awry when President Donald Trump’s attorney general, William Barr, announced on Friday, March 22, that he had received special counsel Robert Mueller’s report and would provide a summary of its findings to certain congressional leaders over the weekend. We should have asked: Why Barr’s summary and not Mueller’s? Presumably, Mueller had attached one to his report. It turned out there was a propagandistic reason for this unusual arrangement: Barr issued the best possible interpretation of Mueller’s report – from the president’s standpoint – including perhaps even a twist on what Mueller had said and intended. This allowed the president and his backers to propagate and celebrate what Mueller didn’t say: that the report’s conclusions were a “total exoneration” of Trump. In fact, even Barr’s brief summary, quoting Mueller’s report, said, “While this report does not conclude that the President committed a crime, it also does not exonerate him.”