Monday, October 4, 2004

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So how did that G-7 dinner go?

Remember that G-7 dinner that Chinese Finance Ministry officials were asked to attend? It took place over the weekend. Chris Giles and Andrew Balls report on the outcome in the Financial Times. First, the dinner:

China resisted pressure by industrialised countries to liberalise its currency regime at this weekend's meetings of the International Monetary Fund and World Bank.

Jin Renquin, China's finance minister, and Zhou Xiaochuan, the central bank governor, attended a working dinner of the Group of Seven industrialised nations on Friday, but maintained China's previous stance that it needed more time before it could consider introducing greater flexibility into its exchange rate.

The dinner was the first time that China, now the world's seventh-largest economy, had attended a G7 meeting.

G7 countries praised the quality of debate and the openness of the Chinese officials, but little progress was made.

More interesting was the assessment at the end of the article on why there might not be any change in global macroeconomic imbalances anytime soon -- although they may be unstatainable in the long run, the status quo ante brings short-run economic benefits and minimal political costs for the U.S., China, and the European Union:

Unlike in many previous meetings, the US did not blame low growth in Japan and Europe for its current account deficit and European delegates refrained from criticising irresponsible US economic policy.

The rapid growth of the global economy in 2004 explains the improved mood in part. But it also reflects a growing understanding that global economic imbalances are the inevitable outcome of the combination of US efforts to boost domestic demand, Asian countries' desires to boost currency reserves and persistently low domestic demand in the eurozone.

"Policies to support an orderly resolution of global imbalances are a shared responsibility", the International Monetary and Financial Committee concluded.

What was left unsaid was that the current economic imbalances are boosting economic performance of most large economies and there is little appetite for the measures that could reduce them, such as tighter fiscal or monetary policy to reduce demand in the US or an appreciation of Asian currencies against the US dollar.

The consequence is likely to be that the US current account deficit will grow even larger as will foreign holdings of US dollar assets.

Few economists think these trends are sustainable in the longer term. They warn that the management of the global economy with ever larger imbalances and a large proportion of the global economy fixed to the dollar is likely to create a much less benign outlook for future IMF and World Bank meetings.

This post from a few weeks ago is also worth checking out -- both on the global imbalances and China's exchange rate policies.

UPDATE: The Economist has more on the G-7 meeting. Money paragraph:

The G7 once held great sway over exchange rates. When it met, in a previous incarnation, in New York in September 1985, it engineered a near-30% decline in the dollar. When it reconvened a year and a half later in Paris, it promptly halted that decline. By breaking bread with the Chinese on Friday, the current G7 is tacitly admitting that it can no longer achieve very much without them.

posted by Dan on 10.04.04 at 12:16 PM


The Asian countries already hold massive excess dolar reserves by historic or "normal" economic standards. Why would they want to hold more except to prevent market forces from moving their currencies?

posted by: spencer on 10.04.04 at 12:16 PM [permalink]

They don't. That's the point; cheap Asian currencies (especially in China) against the dollar support export-driven growth, which in turn supports domestic employment Asian governments value for political reasons.

posted by: Zathras on 10.04.04 at 12:16 PM [permalink]

World economic conditions are already alining towards a Dollar devaluation, if the Chinese do not unhinge from the Dollar, and if the Bush administration continues to spend in deficit territory. Greenspan is myopic in thinking he is averting Inflation by minute Rate hikes. Vision of his part would be to buy and sell U.S. Treasuries at levels which generate at least a 9% Interest rate on them. This is the only thing which will slow down Congress and President. lgl

posted by: lgl on 10.04.04 at 12:16 PM [permalink]

The only rational reason for the US's continued acceptance of the continued growth in overseas purchases of US securities is that they plan to repudiate the debt.

posted by: wisedup on 10.04.04 at 12:16 PM [permalink]

"They don't. That's the point; cheap Asian currencies (especially in China) against the dollar support export-driven growth, which in turn supports domestic employment Asian governments value for political reasons."

For political reasons?!?!

China should continue to give the IMF/World Bank/the US the middle finger (or whatever is the Chinese equivalent). Liberalization of financial markets and floating exchange rates have fostered economic instability. Professor Drezner and the neoclassicals are running out of ammo in defending their theories, which are becoming less economic and more political.

Ever wonder why the IMF is asking China to revalue its currency? Hmm....Stiglitz, Wade and Rodrik are being proven right with each passing day.

posted by: Group B on 10.04.04 at 12:16 PM [permalink]

If China is, politically, choosing to keep its currency low, or overvalue the dollar, that means its sending "too much real stuff" to America for paper. If/ when it starts revaluing, say by 10%, that will mean it loses 10% of the current value of its dollar assets. And the more dollar assets it holds, the less it will want to depress the value of those assets.

And if it chooses to subsidize employment/ development this way, it might well be the shortest cut out of poverty for the hundreds of millions of Chinese living inland. As well as providing Americans with real cheap junk; and some good stuff, too. (Remember when "made in Japan" meant cheap, in price AND quality?)

posted by: Tom Grey - Liberty Dad on 10.04.04 at 12:16 PM [permalink]

Iraq is not the only foreign policy issue that will confront the next president - Bush will never be able to obtain the type of cooperation from our allies that Kerry may be able to obtain on other foreign policy issues and other confrontations, because Bush has burned too many bridges, even assuming Bush could learn from his mistakes, which he has shown no capacity to do.

Even current allies in Iraq are rethinking their support for Bush and the war, which will mean far more serious questions in future when it comes to Bush requests for assistance on other issues and with respect to other confrontations, such as Iran.

Kerry is far more likely to obtain cooperation on these and other future endeavors in the war on terror than Bush will, irrespective of whether he can accomplish more in Iraq.

Thus, in the final analysis, Kerry may or may not do no better getting allies into Iraq than Bush, but he certainly will do no worse, and he will likely do better in future instances that require international cooperation - with Bush, we will be going it alone for another 4 years, both on Iraq and elsewhere; with Kerry, we probably won't, at least outside of Iraq.

As for Kerry's alleged instinctual miscues, that is debatable, just as whether the cold war weapons build up by Reagan brought an end to the cold war. I think not. It is doubtful any of the weapons systems we wasted money on had anything to do with the downfall of the USSR, particularly since the US was never "behind" the USSR in military might.

Conservatives always claimed that communism was a philosophy doomed to fail on its own - so, why not accede to the obvious, communism was unable to survive the monetary drain of exporting revolution, propping up communist countries without sound economies, and aggressive militaristic foreign policy, such as in Afghanistan?

But, rather than blame the downfall of communism on an inevitable decline which would give no boost to their political philosophy, they elevate their hero policymakers with false claims of proficient and successful foreign policy, just like those same policymakers promoted the meme of successful battles against terrorists through tough rhetoric and a militaristic philosophy, when behind the scenes their success was really predicated on trading arms for hostages and the like.

Conservative foreign policy has been a singular failure throughout the world, supporting and breeding dictators and terrorists in every corner of the globe, from Pinochet, through Rios Montt, the Shah, and the Taliban, to Saddam himself.

No philosophy, not even communism, has been more adept at creating a favorable environment for anti-Americanism and terrorism than Republican foreign policy.

That alone is reason enough to throw Bush out of the White House, lest we continue to repeat the mistakes of the past and breed a world of continuous confrontation and American-bred evils such as Abu Ghraib and Gitmo. It's time we stopped the slide towards Soviet-like stalags and a KGB-like homeland security. Such policies breed inevitable repression, fear, anger, and more insecurity then they prevent.

posted by: Advocate for God on 10.04.04 at 12:16 PM [permalink]

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