Of Currency Wars and Capital Controls

As a student of South-South cooperation--no matter how its ambitious goals are often negligible or even contradictory in practice--international bodies promoting such cooperation are of interest to me. One of these happens to be the South Centre, which sends me newsletters every so often either because I subscribed sometime ago or they discovered my research interests in third world issues. It describes itself as an "intergovernmental policy think tank of developing countries" and its HQ is in, er, Geneva. I'd like to think of the location as a manifestation of many important international organizations being based there such as various UN bodies and the WTO. My home country being one of the many LDCs funding this think tank (including China and the DPRK), I have naturally made use of its output once in a while, though it's not always that I agree with its stances.

However, Yilmaz Akyuz recently had a contribution that caught my eye on the quasi-eternal topic of international capital flows. There are, of course, two versions of this story. The first is the one we often hear from the likes of Martin Wolf and other apologists for subprime globalization that goes like something like this:

• LDCs should welcome capital flows since they are more attractive investment destinations with more future growth opportunities than developed ones;
  
• However, LDCs keen on maintaining export competitiveness are wary of local currency appreciation that such inflows bring;
• Hence, capital controls imposed by developing countries to limit inflows unnaturally distort the global economy and promote economic imbalances
  

On the other hand, you have the Guido Mantega [1, 2] "international currency war" version:

• Excessively loose fiscal and monetary policies in developed countries have caused hardships for developing ones by in effect exporting inflation as manifested by heightened prices for food, energy and commodities in the Global South;
  
• Meanwhile, exchange rate policies of benign neglect encourage beggar-thy-neighbour competitive devaluations against LDCs;
• By using capital controls, therefore, LDCs are merely trying to protect themselves from destabilizing policies emanating from developed countries

This coming from the South Centre, you should not be surprised that the second version is what's being promoted here. The major thesis is that large capital inflows tend to precede economic crises felt in the developing world such as the Latin American debt crisis and the Asian contagion. We are said to be on the verge of another lest LDC policymakers introduce capital controls:

Like these past episodes, the current surge in capital inflows is creating fragility in DCs. Deficit countries including Brazil, India, South Africa and Turkey are experiencing currency appreciations faster than surplus economies and relying on capital flows to meet growing external shortfalls. Many of those that have been successful in maintaining strong payments positions are facing credit and asset bubbles. Both categories are now exposed to the risk of instability to a greater extent than during the subprime debacle, though in different ways.

It is almost impossible to predict the timing of capital reversals or their trigger, even when the conditions driving the boom are clearly unsustainable. Still, it is safe to assume that the historically low interest rates in AEs cannot be maintained indefinitely and the current boom can be expected to end as interest rates start to edge up.

And what worse baddie is there under than the USA?

The US is now under deflation-like conditions and the Fed is aiming at creating inflation in goods and asset markets. But its policies are adding more to the commodity boom and credit expansion and asset price rises in DCs.

If commodity prices are kept up by strong growth in China, the continued policy of easy money in the US, along with speculation and political unrest in Arab countries, the Fed may end up facing inflation, but not the kind it wants. In such a case, capital and commodity booms may end in much the same way as the first post-war boom ended in the early 1980s — that is, by a rapid monetary tightening in the US even before the economy fully recovers from the subprime crisis.

The boom may also be ended by a sharp slowdown in China. As a result of a massive stimulus programme financed by cheap credits, large capital inflows and rising commodity prices, the Chinese economy is overheating. Monetary breaks now applied to control inflation could reduce growth considerably, particularly if it pricks the property bubble. The consequent fall in commodity prices could be aggravated by the exit of large sums from commodity futures, creating payments difficulties in commodity-rich economies and leading to extreme risk aversion and flight to safety.

Regardless of how the current surge in capital flows may end, it is likely to coincide with a reversal of commodity prices. The most vulnerable countries are those which have been enjoying the dual benefits of global liquidity expansion. Most of these are in Latin America and Africa and some are running growing deficits despite the commodity bonanza.

When policies falter in managing capital flows, there is no limit to the damage that international finance can inflict on an economy. Multilateral arrangements lack effective mechanisms that restrict beggar-my-neighbour policies by reserve issuers or enforce control on outflows at the source.

The task falls on recipient countries. But many developing countries still adopt a hands-off approach to capital inflows while others have been making half-hearted attempts to control them through taxes that are too low to match large arbitrage profits promised by interest rate differentials and currency appreciations. In either case taking capital controls much more seriously is now the order of the day.

It begs the question of who beggars which neighbours. It kind of beggars belief that we are still in roughly the same place as were when the G20 processes started in being rather more interested in apportioning blame than in devising mutually acceptable solutions. While I am obviously more attuned to the second version of events, I believe that such solutions do exist, but more on those later. Meanwhile, I remain relaxed about imposing such controls.

Potpourri: $ Losing Global Status, $100B AAA Loss

A few hours ago we received word that River Plate, the most storied of Argentinian football clubs which has helped spawn many global footballing legends, was relegated from the first division for the first time in its 110-year history. This resulted in riots in Buenos Aires. How the mighty have fallen! It of course got me thinking about another tarnished has-been in the United States of America. Yes it's falling quite fast in various global league tables, but when will it finally be banished from the commanding heights of the world economy? As you'd expect, the dollar being the leading reserve currency and US Treasuries' AAA status are two indicators under pressure.

I am of the opinion that America deserves to be kicked in the balls as hard as possible as just desserts for its boorish financial behaviour. Plus, there's the added benefit of punishing those continuing processes of subprime globalization by hurting both American debtors and creditors alike. In this vein we have two noteworthy and promising developments. First, UBS recently polled central bankers holding a total of $8 trillion in reserves about the future make-up of these assets. It seems most are getting fed up with America as sentiment towards the currency is diminishing even further as the dollar approaches all-time lows on any number of indices. End result? Most see a movement towards a portfolio of various currencies quite soon:

The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn. More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.

That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency. UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.

Good stuff. However, I am even more anxious to see an even swifter and harder kick delivered to Uncle Sam's (rather minuscule) nuts. For instance, I've covered some dire scenarios of what may happen if the US does not raise its $14.3 trillion debt ceiling and effectively defaults on its obligations. While unlikely--an undisciplined and unprincipled debt addict will never refuse a larger fix, just you wait and see--don't forget that America's creditors would also take a hit. Which, again, is part of the attraction since those who bankroll American debt addiction have it coming too.

And we don't have to wait for an outright credit event; a downgrade will do in financially waterboarding America's foolish creditors who fully deserve such treatment. McGraw-Hill estimates potential losses to US bondholders can amount to some $100 billion:

Investors in the US government bond market could face losses of up to $100bn if the largest economy loses its triple A rating, according to a research arm of McGraw-Hill, the parent of Standard & Poor’s. A ratings downgrade that results in higher bond yields and lower prices could also mean the US Treasury paying $2.3bn-$3.75bn a year more in interest on financing a $1,000bn annual budget deficit.

“If Standard & Poor’s or any of the other major rating agencies downgrade the US, Treasuries would likely drop in value, possibly by as much as $100bn,” said analysts at S&P Valuation and Risk Strategies, a research team separate from the agency.

As an American leader of recent vintage liked to say, bring it on. Time waits for no one; ask River Plate.

Intertwined Fates: bin Laden and the €500 Note

OK, so the absurdist image to the left was Photoshopped by someone with too much free time, but I have more sartorial commentary on bin Laden that is more factual. While we all know that the dollar is currently on another downward spiral necessitating another comical "strong dollar" statement from the hapless US treasury secretary (comical Tim-E?), let's again take stock of where it stands among household names whose familiarity is not necessarily down to wholesome activities. Brazilian supermodel Gisele Bundchen reportedly refuses to be paid in ratty US dollars. Meanwhile, gangsta rap artist Jay-Z sports a briefcase full of €500 notes in a music video--a far cry from when those engaged in this trade used to wear big gold "$" chains. These kinds of notes have also become favoured among the global gangster class (the real sort unlike Jay-Z & Co.) for whom money laundering is a regular activity alike walking the dog.

Although the existence of €500 notes is common knowledge, it's rather few of us who've actually seen it in person. Hence, they've become known as "bin Ladens" in British slang:

The 500 euro note, one of the largest denomination notes in the world, is being pulled from distribution in the United Kingdom. They are known in some countries as "bin Ladens" - the bank note everyone knows exists, but few people other than criminals will ever see. The decision comes after police linked 90 per cent of these notes in circulation to crime, tax evasion and terrorism. The UK's Serious Organised Crime Agency (SOCA), which has been studying currency trading, has concluded the 500 euro note is at the heart of money laundering because it is so easy to move.

It has come to pass in recent news reports that the eponymous Usama bin Laden (deceased) was found wearing a €500 note stitched into his robe along with two important phone numbers. This observation has occasioned some fanciful conjectures. F'rinstance, Slate has a novelty feature guessing how far bin Laden could have gone with this sum:

[U]sama Bin Laden had two telephone numbers and 500 euros in cash sewn into his clothes, CIA Director Leon Panetta told lawmakers this week. That's about $740, or around 60,000 Pakistani rupees. Presumably, if Bin Laden had evaded the SEALs, his disciples would have covered his travel, food, and lodging costs. But, hypothetically, what's the farthest you can get from Abbottabad on 500 euros?

You can read the rest at the link. However, I believe that we have some important political-economic commentary here that exceeds its sartorial value. Get this: even if bin Laden's brain had wasted away to the point that key phone numbers had to be sewed into his garments, he still knew that "strong dollar" policy was unreal from a hideaway with no fixed-line telephone or Internet. Aside from a $740 or so equivalent note being far handier than a $100 one, the hawkish bias of the ECB compared to its Federal Reserve free money counterparts is obvious even to what accounts suggest was an already doddering bin Laden.

And so it would have been written as an epitaph had American helicopter dropping operatives not dumped his body: 'Here lies Usama bin Laden. He died with a "bin Laden" stitched into his active wear.' If a senile rabble-rouser could figure out that holding dollars was a fool's game, well, I pity those who still do. Something else that's receiving an extrajudicial execution at the hands of America is, well, the US dollar.

Shorting America: $ Swoon Chronicles, 2011 Edn

[NOTE: It's time for rubbish collection again, and today's point of collection is familiar to all.] I am rather incredulous about others' fixation on the minimal movement on Treasury yields since S&P dropped its credit warning on the unsuspecting American public. First, it's early days--other agencies have yet to follow. Second, it's only a warning, not an actual downgrade. So, there's plenty to, well, look forward to if your interested in obtaining a (marginally) more honest picture of American fiscal decrepitude, moral turpitude towards the global economy, and overall bad attitude. Then again, Americans famously have no idea of long-term outlook, so you shouldn't expect any better from its commentariat class.

In the meantime, fear not for general sentiment towards the US dollar is falling hard pretty much across the board: against currencies of developing countries and developed countries; commodities; and what else have you. Let's just say that, alike the credit warning, there are plentiful signs of folks losing faith in America. As you can see in the chart above, the dollar index spot (DXY) has hit a three-year low, while all-time lows are not far away last plumbed in 2008.

It's during these times--when dollar weakness threatens to turn into an outright dollar rout--when the Treasury Secretary usually starts taking about "strong dollar" policy. In reality, of course, he's more interested in seeing it devalue--but not become a runaway situation which dents whatever confidence remains in holding greenbacks--AKA American junk. From Reuters:

The dollar fell broadly for a third straight day on Thursday as record low interest rates and the crushing weight of the U.S. budget deficit pushed it closer to an all-time trough against major currencies. The dollar's slide accelerated days after Standard & Poor's slapped a negative outlook on the United States' top AAA credit rating. The agency said a downgrade was possible if authorities can't slash the massive U.S. budget deficit within two years. That prompted investors, from fund managers to foreign central banks that hold trillions of dollars in assets, to opt for anything but the U.S. currency.

"The combination of loose monetary policy and chaos on the fiscal front has people very worried," said Boris Schlossberg, head of research at GFT Forex in New York. "That fear is being reflected in the dollar." Mohamed El-Erian, co-chief investment officer of PIMCO, with $1.2 trillion in assets under management, said, "Absent problems elsewhere in the world, history and economics suggest that America's current fiscal and monetary policy stance will put continued pressures on the dollar."

The dollar index, a gauge of the greenback against six advanced country currencies, fell to 73.735 .DXY, its lowest level since August 2008. Analysts said that sets up a possible run toward its record low of 70.698 touched in March 2008.

People are losing faith in the common currency? You must be reading blogs populated with USA#1-style cheerleaders and other reality-challenged folks:

The euro soared to a 16-month high above $1.46 before easing to $1.4550 EUR=, while the dollar fell 0.8 percent to 81.82 yen JPY=. The Australian dollar rose above $1.07, its highest in nearly three decades, as Australia's 4.75 percent interest rate and its role as a supplier of raw materials to booming Asian markets attracted investors.

Some investors fear a fragile U.S. economic recovery could sputter if the White House and Congress agree to cut the deficit with significant spending cuts or tax hikes. That would likely force the Federal Reserve to hold interest rates at record lows even as other central banks raise them. "There is no clear sign that the U.S. is going to raise interest rates, and that is causing the dollar to depreciate by the day," said Jonathan Xiong, who helps manage about $30 billion at Mellon Capital Management in San Francisco...

Analysts said the euro was on course for a move toward $1.50 if the current momentum continues, despite the possibility of a Greek debt restructuring. Talk that China may invest in Spain had investors shrugging off worries for now about euro zone debt.

So the market is guessing America's woes are far worse than those of the Eurozone--and I use a non-fallacious indicator via their currencies. Factor in endless bouts of depreciation and extraordinarily low rates and investing in America is as raw a deal as you can get. If you're dumb enough to do so, well, you'll have no one to blame but yourself for the worst is yet to come--and few will argue about that.

India Shining: Rupee Symbol Now in MS Windows

Always one to play the foil, let me say that contrary to conventional wisdom among the self-styled digerati, I see no reason to chuck Windows 7 for OS X. Not only is the range of programmes for the former vast, but a smidgen of diligence means you can avoid catching viruses and malware. Yes, you can run software that allows you to run Windows software on a Mac, but it makes little sense to pay extra to run stuff more slowly on a Mac. What is more, ever since Apple switched to Intel from Motorola (PowerPC) processors, the hardware used by both contending operating systems is virtually identical--but Apple charges you significantly more in most instances. Colour me sceptical, and give me Windows 7 over OS X any day. Heck, I run Vista on my four-year-old machine and have had no substantive complaints.

This introduction brings me to further proof that India has arrived on the world stage. Typically, developing markets are not prime Microsoft targets. Among the typical reasons you'll hear are...

• the market is too small;
• where there are Windows users, they typically use pirated software;
• this is because intellectual property laws are not strongly enforced

At one point or another, I am sure software vendors have used these reasons in describing the Indian market. But now it's a different picture altogether. You see, aside from offering software in Hindi, the latest iteration of Windows 7 contains the brand spanking new symbol for the Indian rupee. Currency watchers should be aware of a contest Indian authorities introduced two years ago to create a symbol for India's currency. Finalized just last year, Microsoft is now so confident of India's growing stature that the new character set for Windows worldwide will incorporate it. From Softpedia (!--for the first time ever):

Microsoft has released an update to all supported versions of Windows designed to introduce support for the new currency symbol that will be used from now on for the Indian Rupee. Customers can download variants of KB 2496898 and install the refresh in accordance with the operating system they’re running.

According to the software giant, following the installation of the update, the new currency symbol for the Indian Rupee (which can be seen in the image accompanying this article) will be available in Windows 7 SP1 and RTM, Windows Server 2008 R2 SP1 and RTM, as well as Windows Vista and Windows Server 2008...

Of course, the refresh is not limited at introducing the new symbol for the Rupee. The Redmond company revealed that “this update includes font support, locale changes, and keyboard support.” Before the new symbol was adopted by India for its currency, the Rupee was abbreviated as either Rs or Re, although Indian language alternatives also existed.

The Indian government announced a contest for a new currency symbol back in the first half of 2009, and over a year later the winning design was selected. The official Rupee symbol was created by Udaya Kumar Dharmalingam, who based the design on the Devanagari letter र, to which he added an extra horizontal line.

The new Rupee symbol is already a part of Unicode version 6.0, and it only makes sense for Microsoft to also integrate it into copies of the Windows operating system. Take a good long look at the Rupee symbol above, as it will be used to represent India’s currency just as the case for the US Dollar ($), the Japanese Yen (¥), or the Euro (€).

If the Redmond giant takes the Indian market seriously enough to issue a separate update, then I guess we should all take heed of its prospects. You may think it a minor development, but think of the wider ramifications of Microsoft's eagerness to please this particular market. Indian shining, indeed!

Of Repatriation and Concerted G7 Yen Intervention

My goodness, things are happening so fast that my head is spinning. If the UN establishing a no-fly zone above Libyan airspace wasn't enough, we're now headed for a G7 currency no-speculation zone (of sorts) with regard to the Japanese yen. It certainly isn't everyday when the story on the Yahoo! front page is of G7-coordinated currency intervention. I'm comfortable suggesting that in no other circumstance would market intervention make the headlines were it not for post-disaster Japan being the beneficiary nation in question. You see, the currency of that calamity-stricken country recently hit all-time highs against the US dollar in nominal terms in the wake of the earthquake and tsunami. This, of course, on top of the Japanese government stepping back into FX markets last year after a six-year hiatus.

Longtime FX followers will know that yen movements around this time of the year are attributed to repatriation flows as firms wrap up their fiscal year at the end of March. That is, they need to reconvert their foreign exchange holdings back to yen for the purposes of financial reporting as they close the books. However, well-known commentator Kathy Lien cautions there is no evident pattern in USD/JPY during March:

It is commonly believed that March tends to be a positive month for the Japanese Yen because of the fiscal year end in Japan. Tax incentives and the desire to window dress their balance sheets usually encourage repatriation by Japanese corporations...Contrary to popular belief, there has been no seasonal trading pattern in USD/JPY during the month of March over the past 10 years.

I bring this up for a reason: Nowadays, many attribute the super-strong yen to expectations that widespread yen repatriation will soon follow in efforts to rebuild Japan, Inc. after the disaster. In theory, it would lend yen strength alike in the end-of-fiscal-year story. But speaking of which, doesn't the old story of financial reporting considerations fit into expectations of repatriation as well? For, pressures to window-dress financial statements would be even greater given that a calamity that probably affected any number of businesses occurred so close to the end of the reporting season. It is March, you know.

It's certainly up for debate; perhaps a definitive answer will never emerge as they often don't in mysterious "special FX" land. While the speculators have been cowed for now as the G7 cavalry have mounted a coordinated effort to weaken the yen, let's just say this rolling battle is not over yet. Not by a long shot. From the ever-reliable Reuters:

Japanese shares jumped nearly 3 percent and the yen tumbled on Friday after the G7 group of rich nations agreed on joint intervention to curb the Japanese currency's rise, showing its support as the country struggles with a nuclear crisis. The G7 move comes a day after the yen soared to a record 76.25 in chaotic trading, and a week after Japan was struck by a 9.0 magnitude earthquake and devastating tsunami that crippled the Fukushima nuclear power plant.

"This is the first coordinated intervention we have seen since 2000, so it's going to have a very huge resonating effect on the market," said Kathy Lien [hello again, Kathy], director of currency research at GFT in New York.

The dollar spiked nearly 3 percent to a high of 81.49 after the announcement of joint intervention, which came just as Tokyo stock markets opened. The dollar was last trading around 81.15 yen . Traders said the Bank of Japan had been spotted buying dollars.

Market players saw the move as putting a floor under the dollar around 80 yen for now, but some doubted how much impact it would have in the longer term. "It looks like we'll see a nervous battle between the BOJ and the speculators," Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. "Hedge funds have expanded their asset-holdings to unprecedented levels, so even if it's a coordinated intervention, effectively it may be similar to one-country intervention, so looking mid- long-term, I'm not sure if they'll be able to curb it."

The Nikkei share average was up 2.7 percent, to stand down around 10 percent on the week and headed for its biggest weekly slide since the 2008 financial crisis. JGB futures fell.

Once more, FX battle is joined. While I doubt Japanese authorities will begin making "death to speculators" Mahathir-style pronouncements, now is probably as good a time as any for speculators to lie low.

PRC's PR Stunt: Yanks Can Open RMB Accounts

A couple of years ago during the height of the energy price rises, Venezuelan President Hugo Chavez made a widely-commented PR stunt by making the now Venezuelan government-majority owned firm CITGO sell discounted heating oil to disadvantaged Americans, the implication being that Hugo Chavez cared more about poor Americans than George W. Bush. In the run-up to President Hu Jintao visiting Washington DC on an official visit, we have arguably the same phenomenon at work. However, instead of the greedy energy industry and its favoured politicians, US currency debauchery is firmly in China's crosshairs this time around. Read on...

The ever-reliable Wall Street Journal has had a brace of informative articles lately on how China is relaxing controls on the foreign availability of its currency, the reniminbi AKA the yuan. Anyone who's taken an economics course knows that the three roles of currency are as medium of exchange, store of value, and unit of account. In the past few years, China has been promoting the yuan as a medium of exchange in international trade by extending swaps to Southeast Asian countries, among others, to facilitate the use of RMB in trade. Now, it appears the Chinese are also moving along on the store of value front by allowing state-owned overseas banking subsidiaries to open RMB-denominated accounts for overseas retail and commercial banking clients:

China has launched trading in its currency in the U.S. for the first time, an explicit endorsement by Beijing of the fast-growing market in the yuan and a significant step in the country's plan to foster global trading in its currency. The state-controlled Bank of China Ltd. is allowing customers to trade the yuan, also known as the renminbi, in the U.S., expanding the nascent offshore market for the currency which began last year in Hong Kong.

The decision is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used for trade and investment. "We're preparing for the day when renminbi becomes fully convertible," Li Xiaojing, general manager of Bank of China's New York branch, told The Wall Street Journal. He said the bank's goal is to become "the renminbi clearing center in America."

Until the middle of last year, the buying and selling of yuan had largely been confined to mainland China by the country's strict capital controls. But in July, it opened the currency to trading in Hong Kong. Daily trading has since ballooned from zero to $400 million...

While businesses and individuals in the U.S. can already trade yuan through Western banks such as HSBC Holdings PLC, the move by a Chinese-owned bank marks a stamp of approval by China on the expansion in yuan trading. Bank of China, which is 70%-owned by the government, now allows companies and individuals to buy and sell the Chinese currency through accounts with its U.S. branches.

Bank of China limits the amount of yuan that can be converted by a U.S.-based individual customer to up to $4,000 a day [and $20,000 annually as per the next article]. The restriction is designed to fend off speculation in the currency, bank officials say. But there is no limit, at least for now, on the amount that can be converted by businesses, so long as they are engaged in international trading. The bank has no restrictions on the ability by U.S.-based customers to convert the yuan back into dollars.

Before moving to the next story, do note that the medium of exchange function is proceeding along nicely as well, with more and more China firms accepting yuan as payment during trade settlement:

Chinese regulators last month increased the number of exporters that can use the yuan to settle international transactions from a few hundred to nearly 70,000. Some analysts have predicted that it will be only a few years before 20% to 30% of China's $2.3 trillion in imports could be conducted in yuan rather than dollars. Today, less than 1% is done in yuan, according to London's Standard Chartered Bank. While offshore yuan trading has grown rapidly, it's still a fraction of the $4 trillion daily trading in currency markets world-wide and pales next to trading in the dollar, yen, euro and other currencies.

Simply put, it fits with general expectations of China moving to a fully convertible currency in a few years' time. Certainly, bellyaching Yanks can't complain. Now we get to a really fun personal interest article from the WSJ that gives reasons--nay--implores (smart) Americans to ditch their greenbacks for the currency of the future. Five reasons are given for doing so excerpted here:

• First, it's very unlikely to go down. Of how many investments can you say that? The yuan has very little room to fall farther because it is already seriously undervalued. Beijing has spent hundreds of billions of dollars keeping the currency artificially cheap for years to boost exports.
• Second, it's very likely to go up. Why? China is growing rapidly, is a manufacturing powerhouse and is running an enormous trade surplus. Countries like that usually have very strong currencies. Think of the Japanese yen, or the old German Deutsche mark.
• The third reason for holding some money in yuan: What else are you going to do with it? Interest rates elsewhere are minimal, so you won't be missing out on much. According to Bankrate.com, the highest-yielding six-month certificate of deposit pays just 1.3%, before taxes. The dividend yield on the stock market is 1.7%. You can earn better yields from government bonds—the 10-year Treasury is paying 3.3%—but that's also subject to federal taxes, and you can put yourself at risk from inflation.
• The fourth argument for a yuan account: It makes you more diversified. That's the holy grail of investing. The yuan-dollar exchange rate probably has little, if any, correlation to any other asset in your portfolio. (As a bet against the dollar, it might have some correlation to gold.) The exchange rate between the renminbi and the dollar will follow its own path. This is unlikely to be dictated much, if at all, by developments in stocks or even bonds.
• The fifth and final argument for holding Chinese currency: It may help you offset the costs of U.S. economic decline. Our share of the world economy, which was 24% a decade ago, is this year expected to sink below 20%—the lowest figure in modern times. We are running a current account deficit of 3.5% of gross domestic product. Our national debt has nearly tripled in a decade, and deficits stretch out as far as the eye can see. Will the greenback survive as the world's reserve currency? Why should it? The British pound didn't.

My dear American friends and dollar holders the world over, ask yourself this simple question: How gullible are you in having whatever greenbacks you have left economolested by B-B-B-Bennie of the Feds and Tim "Strong Dollar" Geithner? If you haven't done any diversification yet, well, here's perhaps your last chance in abandoning the hapless, hopeless, godforsaken dollar.

It's an excellent way of showing up American economic mismanagement--the Chinese indeed offer Americans a better bargain than their own easy money enthusiasts who've helped make the United States an economic cesspool and global laughingstock. If Hugo can do it, trillion dollar man Hu can too.

Brazil FinMin: From Currency War to Trade War

If nothing else, you gotta love this guy for his military-industrial complex of sorts where economic misunderstandings forever threaten to take us to the brink of all-out conflict. A few months ago, Brazilian Finance Minister Guido Mantega had the international press corps by the ear after his statement that the world was engaged in "international currency war." Perhaps tired of that phrase and desiring attention once again, he's now moved on from that shtick in proclaiming that we are on the brink of outright "trade war." Being more of an equal opportunity complainer this time around, Mantega now identifies not just the US but also China as being currency manipulators. I'm somewhat surprised that he would so vocally single out another important emerging economy, but hey, maybe things are really becoming dire in Brazil when it now runs a current account deficit with the United States, of all countries:

“This is a currency war that is turning into a trade war,” Mr Mantega said in his first exclusive interview since Dilma Rousseff, Brazil’s new president, took office on January 1. His comments follow interventions in currency markets by Brazil, Chile and Peru last week and recent sharp rises in the Australian dollar, the Swiss franc and other currencies amid an exodus of investment from the sluggish economies of the US and Europe...

Mr Mantega, [Brazil's] finance minister since 2006, coined the term “currency war” in September before launching controls on foreign portfolio investments in Brazil aimed at stemming an increase of 39 per cent in the real against the dollar over the past two years. He said that most of Brazil’s measures last year were directed at the spot market but the focus had switched to the futures markets, which he said were now behind the upward pressure on the currency.

On Thursday, Brazil’s central bank launched a surprise measure to curb short selling of the dollar against the real by onshore banks. “You can expect more measures on the futures market,” he said.

He said currency manipulation would be on the G20 agenda this year. Brazil would also lobby to have the WTO define exchange-rate manipulation as a form of veiled export subsidy. Any attempt to change WTO rules to incorporate exchange rates would be difficult, however, as China could be expected to veto it, analysts said.

Mr Mantega said that Brazil’s trade with the US had slipped from an annual surplus of about $15bn (£9.6bn) in Brazil’s favour to a deficit of $6bn since the US began trying to reflate its economy through loose monetary policy. He said China’s undervalued currency was also distorting world trade. “We have excellent trade relations with China ... But there are some problems ... Of course we would like to see a revaluation of the renminbi.”

If not necessarily approving of them, you have to acknowledge the thoroughness of Brazil's countermeasures to keep the real low--intervening in spot and forward markets; making its voice heard at the G20 and WTO, etc. they're playing for keeps and have gone beyond what most other countries have done despite their similar bellyaching.

So how would Brazil line up if the United States were to pursue the inclusion of undervalued exchange rates as an actionable subsidy at the WTO? Do Brazil's loyalties lie with the US, China, or mostly just with itself? That would be interesting to watch. Latin melodrama--don't leave home without it.

FX Intervention Trifecta: Korea, Malaysia, Thailand

Oh, will the combatants ever cease from "international currency war" so we can celebrate the holidays in relative peace? With the US dollar doing another of its habitual swoons due to much-lamented American free money policies, Asian economies not particularly keen on shooting themselves in the foot are having to wade into the open market and buy the godforsaken and hapless greenback to stem the appreciation of their currencies. From the Wall Street Journal comes this snippet:

Central banks in South Korea, Malaysia and Thailand are believed to have intervened in foreign-exchange markets Thursday as Asian currencies surged against the dollar on optimism about the region's economic outlook, underscored by strong economic data from China and signals that the yuan will continue to strengthen.

Taiwan, meanwhile, unveiled measures to buttress its banking system against rapid movements in foreign capital, the latest Asian economy to introduce stricter regulations to control the risks posed by such capital flows...

In Kuala Lumpur, traders said Malaysia's central bank was suspected of buying dollars to curb a rise in the ringgit, which hit a three-month high Thursday. Bank Negara Malaysia may have bought dollars at around 3.0810-3.0820 ringgit per dollar, dealers said. The dollar was at 3.0846 ringgit in late trade.

Traders in Seoul said they suspected the Bank of Korea entered the market, buying more than $500 million at several intervals between 1,135 and 1,140 won per dollar. The dollar closed at 1,134.80 won, bringing the won's gains against the dollar to 2.6% for the year.

In Bangkok, the dollar was at 30.15 baht in late trade—down from 30.16 baht late Wednesday—with suspected buying by the central bank around that level to limit the downside, two dealers said.

In Taipei, which has been trying to temper gains in the New Taiwan dollar—a favorite among investors seeking exposure to China, given Taiwan's increasingly close economic ties to the mainland—Taiwan's central bank announced new measures to control capital flows. Starting Saturday, local banks will have to set aside 90% of foreign investors' new deposits as reserves, a leap from the current level of 9.775%.

So the usually America-friendly Martin Wolf believes Asian countries cannot win in the US-led "international currency war." I don't see any sign of many of these Asian countries relenting just yet, though. 2011 promises to be more of the same unless something major changes the outlook of these nations. For, Bernanke's chopper will surely be strafing us with greenback emissions from greater heights--of that you can be as certain of as death and taxes.

Tobin Tax Time? Thailand Thinks of Slapping 'Em

What a difference a decade makes! Just a little over ten years ago, Thailand and South Korea were at the IMF poorhouse after exhausting their foreign exchange reserves. Now featuring coffers full of foreign exchange after export-led recoveries in subsequent years, the real problem they face nowadays is coping with the American-led money-for-nothing barrage that threatens to overwhelm their financial systems with an unwelcome influx of hot money.

So, we have Thailand reviving that IPE chestnut of an idea, the Tobin Tax. Nobel Laureate in Economics James Tobin once suggested that a nominal tax be applied to financial transactions to both generate revenue (for socially useful purposes, one would hope) and to throw sand in the wheels of international finance. There was much heated discussion here in London when Lord Turner and Gordon Brown voiced the possibility of implementing this tax. The City being Europe or, in a broader sense, the world's financial centre, nothing came of it. In the context of the once-Asian financial crisis-hit economies of Thailand and South Korea, however, the goal would be to limit a sharp influx on capital that could promote bubbles and increase volatility due to speculative flows:

Thailand's central bank is prepared to use more capital control measures, including a Tobin-style tax on international transactions, but sees no need to impose them now, the central bank chief said on Wednesday. He said inflation was not a concern at the moment, reinforcing expectations the central bank would keep its trend-setting one-day repurchase rate unchanged at 1.75 percent at next Wednesday's policy-setting meeting.

In his first interview with foreign news organisations since taking the helm of the central bank on Oct. 1, Prasarn Trairatvorakul said the Thai economy faces "lots of uncertainties" -- from global economic troubles to a national Thai election expected next year. "The best way for us is to have a variety of policy tools and then be able to use a mixture of them in a good proportion, hopefully at good timing," said the 58-year-old former president of Thailand's No. 3 bank, Kasikornbank .

Asked whether the central bank was prepared to impose a one-time inflow tax or a Tobin tax, he said: "In our toolkit, this is one component. To use it or not is another matter." Nobel prize-winning U.S. economist James Tobin first proposed a small levy on currency trading in 1972 to penalise short-term speculation after the United States abandoned the gold standard.

The idea is gaining steam in Asia. South Korean Finance Minister Yoon Jeung-hyun said on Oct. 19 his country was also studying a Tobin-style tax as easy-money policies in the developed world swamp emerging-market economies from Thailand to Brazil with capital searching for higher returns.

Prasarn acknowledged Thailand's interest rates remained low compared with the country's Asian neighbours, especially given projections that growth will reach as much as 8 percent this year. But he said global capital flows presented a "dilemma". This year alone has seen $30 billion in capital inflows into the country, he said, including $18 billion of portfolio flows. "The more you increase the rate the more you attract this capital flow," he said. "It is like giving our benefits to these undeserved investors. Why do you want to do that?"

There is even talk of pan-regional efforts to limit capital flows through instruments alike the Tobin tax:

He said the Bank of Thailand is in regular contact with other regional central banks and "there could be cooperation" in monetary policies if conditions called for it. He said imposing a Tobin-style tax would be relatively easy, requiring just an emergency decree by the Ministry of Finance with Cabinet approval, rather than overhauling tax laws. But Thailand is treading carefully after tough capital controls in late 2006 triggered a record one-day selloff in the stock market. Those have since been lifted.

He described as a "problem" the U.S. Federal Reserve's decision this month to embark on another round of "quantitative easing", buying an extra $600 billion of government bonds with freshly printed money. The U.S. measure has deepened fears of heavy capital flows battering emerging Asia.

In October, Thailand imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai debt to try to stem inflows. More recently the central bank imposed a borrowing limit of 90 percent of the purchase price on new condominiums to prevent the market from overheating.

Prasarn said a possible trigger for further controls could be volatility in the baht on trade-weighted terms, but he said its nominal effective exchange rate was "still manageable"...[He also said] "When you have low interest rates for a long time and you also have a huge amount of capital available, it can lead to problems of an asset price bubble," he said. "We have sent that signal. That's an indication of what we want to tell the public."

What can I say? All's fair in love and international currency war. Let James Tobin show us the way.

Lobotomarkets, Korea and the US Dollar Edition

As 2008 demonstrated, there is little rhyme or reason to financial markets. Today, however, I must being your attention to an example of the seeming brainlessness of foreign exchange markets that defies explanation. Literally, forex is a lobotomarket. When a lobotomy is performed, you just don't know how the patient (victim?) will respond. In the current situation, the operation in question was the recent fatal attack by North Korea on South Korea. While certainly a headline-grabbing event, I am utterly bemused by the subsequent response from the foreign exchange market. In particular, the US dollar has rather inexplicably strengthened. Here is a typical explanation care of Reuters:

The euro languished at two month lows early in Asia on Wednesday, threatening to deepen its losses, while the euro zone debt crisis and heightened tensions in the Korean Pennisular helped underpin the dollar.

Longtime readers know that I am perma-bearish on the US dollar. Notably, there have been occasional dead cat bounces: whenever the Eurozone is in trouble such as now, for instance, or when repatriation flows back to the US increase given "political risk" abroad. Clearly, we have both at the moment with the troubles of Ireland and the Koreas resuming intramural proceedings. However, it's odd that other currencies besides the euro--not all of them, mind you--have followed it down (for now).

Simply put, forex dunderheads, why exactly would European countries--or many others for that matter--be at greater downside risk than the US from North Korean attack?

• The United States, not Europe, has nearly 30,000 troops stationed in South Korea;
• The United States, not Europe, is immediately obliged to defend South Korea in the event that war resumes on the Korean peninsula;
• The United States, not Europe, most strenuously raises the hermit kingdom's ire over nuclear weapons development;
• The United States, not Europe, has a massive Pacific Fleet whose main objective is to keep open the flow of commerce in the Asia-Pacific.

If full-scale hostilities emerge, the one on the hook for expending much blood and treasure should be clear to all:

OPLAN 5027-00

According to the 04 December 2000 South Korean Defense Ministry White Paper, the United States would deploy up to 690,000 troops on the Korean peninsula if a new war breaks out. The United States apparently had considerably increased the number of troops that would be deployed in any new Korean conflict. The figure had risen from 480,000 in plans made in the early 1990s and 630,000 in the mid-1990s. The latest Time Phased Forces Deployment Data for any contingency on the Korean Peninsula is comprised of 690,000 troops, 160 Navy ships and 1,600 aircraft deployed from the U.S. within 90 days.

So why would the currency of a country that's deeply involved in East Asia's security architecture be less vulnerable to recent events than that of an economic union that isn't? The commitments being touted above make Iraq and Afghanistan look like walks in the park; that much is obvious. Beats me, pal. Then again, if logic dictated forex movements, I'd be a wealth man instead of a mere blogger, right?

Nuff Said: 'US-Sino Currency Rap Battle'

An IPE@UNC homie name checks yours truly and points us in the direction of--I kid you not--the "US-Sino Currency Rap Battle." It's actually very entertaining if I have a quibble here and there. F'rinstance:

• Uncle Sam goes from a beggar to more than holding his own against a panda (representing China) by the clip's end--not quite consistent;
• The chorus stresses interdependence a bit too much for my tastes;
• Since the scriptwriters are billing this as a primer on the upcoming G-20 summit, shouldn't there be some talk about Germany as well as others complaining about US actions like Brazil?
• Why is "Timmy G" being sent by Obama to rat-ta-tat-tat his gat at PRC currency miscreants? He doesn't strike me as very tough since he's continually refused to designate China a currency manipulator. Also, his most memorable China incident was being laughed off at PKU when asked whether the PRC's dollar holdings were safe;
• The animators missed this great opportunity to show Bernanke helicopter dropping wads of cash around the globe (please make this the subject of your next video feature!)
• It's not really the use of the dollar as a vehicle currency but rather it's use as a reserve currency that buoys it. For the difference between a flow (less important) and a stock (more important) concept in foreign exchange, see a previous post.
  

Anyway, those are minor nitpicks. More of this! (And yes, they probably should just cut the crap and start fighting already. We're all likely better off that way instead of sticking with a suboptimal current situation.)

World Bank Chief Zoellick Clarifies Gold Position

As a follow-up to my previous post, it is gratifying that my doubts about what many thought World Bank President Robert Zoellick said were valid. He certainly isn't advocating a return to the gold standard. The important clue, of course, is that he didn't mention gold right off the bat but as his fifth and final point in a list of five actions to get the world economy going again in a more harmonious manner. Again, he mentions gold in the context of forming a basket of references including many reserve currencies. In effect, the soaring price of gold is a wake-up call to those who should know better:

The soaring price of gold reflects international unease about the strength of large developed economies that must be taken seriously by the Group of 20 leading nations, according to Robert Zoellick, president of the World Bank. Mr Zoellick on Wednesday said the increasing use of gold as a monetary asset was an “elephant in the room” that was being ignored by policymakers in the debate over how to correct global trade and fiscal imbalances. The World Bank head added that the search for an alternative to the weak currencies of much of the developed world underlined the need for a co-ordinated package of growth measures based on free trade and structural reforms.

Mr Zoellick dismissed criticism of his proposal in Monday’s Financial Times for a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values. He said critics had misunderstood his proposal as a call for a return to the gold standard – the framework of fixed exchange rates backed by gold which was replaced after the second world war by the Bretton Woods system of fixed but adjustable exchange rates.

Speaking at a Financial Times conference on infrastructure spending, Mr Zoellick said the price of gold, which this week surged past $1,400 a troy ounce, indicated that the world was heading towards a new monetary system in which the US dollar would be only one of a number of reserve currencies with flexible exchange rates. Others would include the euro, the yen, the pound and the renminbi, as China moved towards removing controls on the convertibility of the currency.

“Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard,” said Mr Zoellick. “Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange. “So, in relative terms, gold is appealing to people who ask where should I put my money. It is a hedge against uncertainty.”

Mr Zoellick said the use of gold indicated that the largest economies “need pro-growth policies, structural reforms, open trade and an anti-protectionist agenda”. He said that would build confidence in private sector development.

Again, my conviction is the same: as a Republican, Zoellick is using this opportunity in light of the upcoming G-20 summit to warn the US of its various fiscal and monetary shenanigans further diminishing international stature. Would the price of gold be going through the roof if the US were running conventional policies? Think about it for a moment. Zoellick is merely expressing sentiments others like China have expressed about a messed up system which is dominated by a messed up country run by pansies.

That said, I sure would like to hear Zoellick elaborate at greater length on how to reform the international currency system since the outline he provided basically just points out that people are using gold as another price reference. It's one thing to suggest that gold's price is being used as a reference, but another to incorporate it into a basket of reserve currencies alike the SDR.

PRC Sees US 'Central Planning' + More QE Stories

OK, so this series of stories on Federal Reserve quantitative easing is getting [1, 2, 3, 4] slightly excessive, but I just had to post about this fascinating grab bag from Reuters on how the rest of the world is apparently not very happy about US monetary policies--especially the announced $600 billion additional central bank purchases of Treasury bills to mid-2011. The prize quote, of course is China complaining of American 'central planning' [!]--this from a country that has strict capital and foreign exchange controls and is still considered a 'non-market economy' by the US to the PRC's chagrin. That's entertainment as Chinese bellyaching about the US often passes into the realm of over-the-top hyperbole, although we should of course note that any number of G-20 members are unhappy about American go-it-alone actions as well.

In the immortal words of the late, great Telly Savalas, perhaps it's time the US asked of itself, 'Who Loves Ya, Baby?' With the upcoming G-20 leader's summit in South Korea just days away, let's say our American friends have a lot of explaining to do:

Global anger at a fresh round of liquidity injections into the U.S. economy swelled on Friday as Germany called the move "clueless" and emerging nations protested that it will wreak havoc on them...

China landed its own blows by saying a U.S. proposal for numerical targets for surpluses and deficits -- akin to a range for yuan appreciation -- smacked of outmoded central planning that won't win any friends for the United States. Chinese Vice-Foreign Minister Cui Tiankai, who is China's chief G20 negotiator, told a news briefing that he was also worried at the prospect of a flood of money pouring into global markets in search of higher yields. "They owe us some explanation," Cui said. "I've seen much concern about the impact of this policy on financial stability in other countries."

A "common theme" is emerging that "excess liquidity in the U.S. is creating problems in other countries," Brazil's Central Bank Governor Henrique Meirelles told reporters in Chicago. Resentment abroad stems from worry that Fed pump-priming will hasten the U.S. dollar's slide and cause their currencies to shoot up in value, setting the stage for asset bubbles and making a future burst of inflation more likely.

"With all due respect, U.S. policy is clueless," German Finance Minister Wolfgang Schaeuble told a conference. "(The problem) is not a shortage of liquidity. It's not that the Americans haven't pumped enough liquidity into the market, and now to say let's pump more into the market is not going to solve their problems"...German Chancellor Angela Merkel will address U.S. policy in Group of 20 discussions on exchange rates, a government source said, adding that she shared Schaeuble's criticism.

Policymakers from the world's new economic powerhouses in Latin America and Asia have said they would consider fresh steps to curb capital inflows after the Fed's move...South African Finance Minister Pravin Gordhan said Fed policy "undermines the spirit of multilateral cooperation" that the G20 had sought to achieve. The money will find its way into financial markets of emerging nations with potentially devastating impact on their exports, he charged...

Efforts to reduce imbalances that are destabilizing the global economy will top the agenda of the Nov. 11-12 summit of the Group of 20 forum of leading economies in Seoul. China and Germany oppose a plan floated by U.S. Treasury Secretary Timothy Geithner last month to cap current account surpluses and deficits at 4 percent of gross domestic product. "

Of course, we hope to see more balanced current accounts," Chinese Vice-Foreign Minister Cui Tiankai told a news briefing. "But we believe it would not be a good approach to single out this issue and focus all attention on it. The artificial setting of a numerical target cannot but remind us of the days of planned economies." Cui, China's chief G20 negotiator, also rejected any attempt to set target ranges for the yuan to appreciate. "That would indeed be asking us to manipulate the ... exchange rate, and it is something that we will of course not do," Cui said.

Needless to say, I particularly enjoy this analogy of current account limits to manipulating one's exchange rate as something the PRC doesn't want to do. [Okey-dokey, if you say so...] Perhaps because it is hosting the G-20 this year, the South Koreans are obliged to be--outwardly--at least more, ah, accommodative of American 'friendly fire', though I of course don't expect anything to come out of this process of non-binding commitments:

South Korea had hoped to make development issues the focus of the G-20 summit but those plans were overtaken by currency battles—and successful U.S. efforts to focus the meeting on Chinese foreign-exchange practices. Mr. Lee said he was optimistic for the summit but some G-20 negotiators outside the U.S. have been frustrated by the turn of events.

The most attention has focused on a joint Korean-U.S. plan to limit the trade surpluses and deficits that underlie and reflect currency movements. At a G-20 finance ministers meeting late last month, the group agreed to adopt "indicative guidelines" of what constitutes an over-the-top deficit or surplus....The International Monetary Fund would play umpire and name countries that didn't meet the standard. The U.S. is pushing the group to limit surpluses at 4% of gross domestic product, a standard Washington believes would prompt China to let its currency rise further.

Any deal, President Lee said, wouldn't be enforceable in the way, say, trade decisions are enforced by the World Trade Organization, which can authorize trade sanctions against losing parties. "There aren't any legal obligations," Mr. Lee said. But he said the months of discussion among G-20 countries would produce "a peer-pressure kind of effect on these countries" that violated the deal. "There is a common understanding that if we do not work among ourselves, we fear we will return to protectionist measures" that will harm all G-20 nations, said Mr. Lee...

Mr. Lee said the recent U.S. Federal Reserve decision to buy long-term government securities "will have an effect on foreign-exchange rates around the world." But he said he didn't believe the U.S. was pursuing a strategy of competitive devaluation. "It was more in line with the urgency they were feeling within the U.S. [about] the very slow pace of the recovery...It's very important not only for Korea, but for countries around the world, to have a very healthy and robust U.S. economy," he said.

Ditto for the Canadians, so I guess it's who loves ya baby, eh?

US 'Strong Dollar Policy' Hilarity Returns

Oh man, I wish the weekend would have brought some blogging rest, but these American jokesters just keep upping the tragicomic quotient. With the US dollar dropping like a rock in recent months due to widespread anticipation of further quantitative easing from the Federal Reserve, I was utterly dumbfounded when one US Secretary Tim Geithner had the temerity to reiterate 'strong dollar policy' at a gathering of APEC finance ministers in Kyoto, Japan just a few hours ago:

Asked if he will push for a 4 percent current account target to be included in the G20 communique at Seoul: "That is not our intention. What our intention is, is to keep trying to build support for this and to allow the experts to do the detailed hard work, to build a framework that people will have some confidence in over time. There's nothing on the table except for 'indicative guidelines' ...

"I'm happy to reaffirm again that a strong dollar is in our interest as a country, it's very important to the United States, and we will never use our currency as a tool to gain competitive advantage [my emphasis]. "And we recognise that the dollar's role in the monetary system conveys special burdens, responsibilities on the United States for broader global responsibilities and we take those responsibilities very seriously and we are as you know working very hard to make sure we're improving the underlying fundamentals of the U.S. economy."

Having been laughed out of China before, I guess the thankless job of being US treasury secretary includes reiterating 'strong dollar policy' with a straight face despite all evidence to the contrary. In essence, dollar depreciation is what can be done but not said as there is really nothing to suggest the US is serious about implementing policies to stop its ongoing slide. If you don't put these Americans in their place, they'll make a joke out of you, too.

UPDATE: Looking back, there tends to be an upswing in "strong dollar policy" statements when there are noticeable drops in the US dollar index. I'll try and plot treasury secretary "strong dollar policy" pronouncements against the US dollar index and see what can be explained.

Those Poor Swiss Victims of Currency War (Really)

[It seems we've largely overlooked a sleeper of an international currency warrior, but I'm blowing its cover Scooter Libby-style right here, right now.] I've just come from an interesting talk here at the LSE featuring IMF Chief Economist Olivier Blanchard simply entitled "The State of the World Economy." Not being a particularly big fan of Blanchard--and his somewhat odd reminiscing about his time at the LSE with one Larry Summers didn't help--the subject matter was at least intriguing. Among other things, even Blanchard sees a role for capital controls once inflows reach inflation-threatening thresholds. One of the most obvious bits that I looked forward to was discussion of "international currency war" being waged by the United States on all and sundry.

We all know who the most prominent complainers are since their complaints are loud and clear--Brazil, China, and so forth. However, Blanchard reminded all of us that the Swiss are also actively trying to manage their exchange rate. Not only do they fear a decline of export competitiveness, but they also have to deal with "organic" inflows as a consequence of being an international centre of finance. A few months ago, I featured Swiss foreign exchange intervention that was increasing in light of EUR/CHF slumping since its largest trading partner is the EU. As it turns out, the magnitude of Swiss action deserves more mention than we previously thought. Which, of course, is odd since (a) Switzerland is no Johnny-come-lately to industrialization, (b) we haven't heard much about it intervening, and (c) the Swiss franc is a reserve currency in its own right. Chalk this one up to keeping your trap shut and avoiding others' ire in the process. Also chalk it up to long Swiss experience managing money discreetly. Some things never change.

Anyway, Reuters has these bullet points to offer. Let's just say the Swiss aren't too happy with the current state of affairs. What's more, Swiss National Bank actions with respect to re-entering the FX markets are contingent on what Japan will do:

• Cenbank spent nearly 200 billion Swiss francs via interventions from March 2009
• Interventions stopped in June of this year
• Traders speculate Japan move could prompt SNB to resume intervention
• Swiss franc flirting with parity against dollar

On the first point, we arrive at the chart above plotting Swiss foreign exchange reserve data courtesy of the IMF for the period starting March 2009 (when it had about $80B in reserves) to June 2010 (when it had $255B)-- when the SNB was actively selling Swiss francs. It's pretty remarkable how more than tripling its stash in little over a year has gone quietly, but there it is. With the US set to go on the offensive again, who's to say that the Swiss will stand pat? And let loose the hush puppies [shhh] of international currency war.

Those Poor Brazilian Victims of Currency War

Having coined the endearing term "international currency war," Brazilian Finance Minister Guido Mantega and his erstwhile superiors are now complaining about the (largely anticipated) $600 billion greenback aerial bombardment the Fed will soon mount with extreme prejudice. With the Brazilian real up nearly 40 percent since early 2009, the country's industries are running into serious headwinds in export markets and are understandably keen on the government doing something about it. While Brazil has slapped taxes on foreigners buying local bonds, it hasn't done a heck of a lot to curb inflows. So, President Lula and President-Elect Rousseff are jetting of to the G20 to protest pretty soon. Oh my, what hath the Americans done?

Brazil, the country that fired the gun on the so-called “currency wars”, is girding itself for further battle. Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.

“It’s no use throwing dollars out of a helicopter,” Guido Mantega, the finance minister, said on Thursday. “The only result is to devalue the dollar to achieve greater competitiveness on international markets.” At a joint press conference with president-elect Dilma Rousseff, outgoing president Luiz Inácio Lula da Silva said on Wednesday he would travel to the G20 summit in Seoul with Ms Rousseff, ready to take “all the necessary measures to not allow our currency to become overvalued” and to “fight for Brazil’s interests”. “They’ll have to face two of us this time!” he said.

Ms Rousseff added: “The last time there was a series of competitive devaluations[,] it ended in world war two.” Brazil has been an early casualty in the currency wars, as the real has risen by 39 per cent against the dollar since the start of 2009, prompting fears it will hollow out Brazil’s industrial base by making manufactured exports uncompetitive. Data released on Thursday showed September industrial output was 2 per cent lower than in March. “Brazilian industry is well and truly stuck in a rut, due in part to the recent strength of the real,” Capital Economics, a London-based research firm, said in a note to clients on Thursday.

“[The Fed’s decision] is cause for concern. These are policies that impoverish those around them and end up prompting retaliatory measures,” Brazil’s foreign trade secretary, Welber Barral, said separately.

With local benchmark interest rates at 10.75 per cent – the G20’s highest after stripping out 5 per cent inflation – international capital has flooded into Brazil. To curb that, the country has imposed a 6 per cent tax on bond inflows, but with limited effect so far. Emerging market fund managers say the tax, paid on point of entry, has had some impact on short-term bond investors – but not on long bonds held to maturity which, after netting off the tax, still provide a yield of about 11 per cent. “That’s higher than you can get anywhere else, especially for an investment- grade credit,” said Kieran Curtis, emerging markets fund manager at Aviva investors, which has £1.3bn under management.

Economists agree that one reason why Brazilian interest rates are so high is loose fiscal policy. Federal government spending has grown by 18 per cent this year. Ms Rousseff has pledged to trim government spending, although there are doubts that she will be able to push through cuts.

International currency war? Competitive devaluations leading to World War II? Let's just say the boys and girls from Brazil have a major military-industrial complex going on. Yo Guido Mantega, fire your guns!

Up Next: 33 Hours of Mortal Kurrency Kombat

And so we return to the frontlines of "international currency war" as declared by Brazilian Finance Minister Guido Mantega. Last month, G20 finance ministers (with the notable exception of Mantega) signed off on a communique vowing to "move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies." However, it's been so much bluster as we prepare for an immediate test of these rather hokey ideas. Simply put, the bigwig nations are all going to announce policy rate decisions within 33 hours of each other--it's quite a rate occurrence that these decisions come one after another is such a short span of time. The US Federal Reserve will get things rolling, with the Bank of England, European Central Bank, and the Bank of Japan all set to do the same over the aforementioned time frame.

As someone who's worked as a journalist before, I appreciate a good headline when Bloomberg says "Thirty-Three Hour Race Many Induce EU Surrender." Which, strictly speaking, is not really correct since that's the total time between the first (FED) and last (BoJ) reporting. Nevertheless, the main idea is that the Europeans--uniquely hawkish among the big 4 as ECB President Jean-Claude Trichet has said "stimulate no more"--may nevertheless be forced to take expansionary policies against their will. With the Americans set go on the offensive by strafing the world economy with nearly unlimited dollar emissions via now-famous Bernanke helicopter drops, the EU's hand may be forced in following suit to ensure that rapid euro appreciation doesn't ensue. In effect, Jean-Claude "Stimulate No More" Trichet might be pressured to capitulate to Yankee dollar firebombing.

Not one to be left behind in the headline hyperbole sweepstakes, I believe I'm no slouch with clever phrases. So, after "international currency war" and "EU surrender," I'll do both one better and declare ourselves on the verge of "mortal kurrency kombat" commencing with the Fed decision:

Federal Reserve Chairman Ben S. Bernanke’s push to jump-start the U.S. economy this week may weaken the dollar, forcing at least one other central bank to add its own stimulus to offset a rising exchange rate. Bernanke is set to embark on an unprecedented second round of unconventional monetary easing, one result of which may be a cheaper dollar that boosts U.S. growth by helping American exports. A related consequence: stronger currencies abroad, threatening European and Japanese expansion.

With the major central banks all announcing decisions within 33 hours this week, fallout from the Fed could cause Bank of Japan Governor Masaaki Shirakawa to do more for his economy and Bank of England Governor Mervyn King to leave the door open to more aid. Even as European Central Bank President Jean-Claude Trichet holds the line against inflation, he may eventually change course if the euro surges, while emerging markets are already acting to restrain currencies.

“An easing in U.S. monetary policy creates pressure on the rest of the world to respond,” said Dominic Wilson, New York- based senior global economist at Goldman Sachs Group Inc. in New York. “The subsequent weakening in the dollar tends to tighten financial conditions outside the U.S.”

This week’s meetings are the greatest concentration of monetary-policy action by leading central banks since the first week of October 2008, when they met in emergency sessions to fight the global financial crisis. On that occasion, all except Japan joined an unprecedented coordinated interest-rate cut.

Now they’re invested in dealing with their own challenges. Bernanke has signaled he will restart large-scale asset purchases to help reduce unemployment and raise consumer prices. King indicated last month he ultimately may favor buying more bonds to support the U.K.’s recovery as its government aims for the biggest budget cuts since World War II.

Shirakawa and his [BoJ] colleagues, after vowing to keep their benchmark interest rate at “virtually zero” last month and expanding their balance sheet, plan to buy exchange-traded funds and real-estate-investment trusts to beat deflation. Trichet nevertheless calls the ECB’s monetary-policy stance “appropriate.” The central-bank president is focusing on tougher fiscal discipline as the path to assure growth after runaway deficits led to Greece’s near-default and a continental debt crisis.

It's bloody awful, methinks, but we are where we are--every central banker for himself:

“It’s a nice idea to coordinate policy, but a central bank has to do what’s appropriate for its own economy,” said DeAnne Julius, a former Bank of England policy maker who is now chairman of Chatham House, an international research group in London. “It’s difficult to do otherwise economically and politically.”

On Nov. 3 at about 2:15 p.m. in Washington, the Fed will release its policy decision. About 18 hours later, at noon in London (8 a.m. in New York and Washington), the U.K. central bank will announce its move. The ECB will go public with its decision 45 minutes later, at 1:45 p.m. in Frankfurt (8:45 a.m. in New York). The Bank of Japan concludes its talks on Nov. 5 at about noon local time (11 p.m. in New York).

Since Bernanke said Aug. 27 that his central bank was prepared to add stimulus if necessary, the Standard & Poor’s 500 Index has gained 13 percent, while the dollar has declined about 7 percent against a basket of six currencies. This may constrain initial market reaction to a Fed announcement of so-called quantitative easing, said Keith Hembre, Minneapolis-based chief economist at U.S. Bancorp’s FAF Advisors Inc., which oversees $86 billion...

The "currency vigilantes" will likely punish the money-for-nothing crowd...

Still, money managers at M & G Investments in London predict the rise of “currency vigilantes,” a play on “bond vigilantes,” the term coined by Edward Yardeni in 1983 for investors who would push down bond prices when they felt fiscal or monetary policies were running out of control. “Currency vigilantes punish those central banks who print too much money by weakening their currency,” said Michael Riddell, a fund manager who helps M & G oversee about 178 billion pounds ($286 billion). “Over the longer-term, we’re bearish on the dollar and sterling.”

The Fed will pledge this week to buy assets of $500 billion or more, according to 29 of 56 economists surveyed by Bloomberg News last week, while another seven predicted $50 billion to $100 billion in monthly purchases without a specified total. Estimates for the ultimate size of the program include $1 trillion by BofA-Merrill Lynch Global Research and $2 trillion by Goldman Sachs. Purchases of $500 billion would add as much stimulus as reducing the Fed’s benchmark rate by 0.5 to 0.75 percentage point, New York Fed President William Dudley said in an Oct. 1 speech...

...and we get to the poor Eurozone that may be whiplashed by all this foolishness. The Japanese are keeping a wary eye on the Fed as well and have the trigger finger on further intervention should it believe things are getting out of line due to blowback from the land of the free money:

The risk of the ECB’s tightening bias is that a stronger euro threatens exports, which have led the region’s recovery, as well as the ability of so-called peripheral economies such as Greece to escape deflation. The single currency has gained about 7 percent against the dollar since mid-September. Goldman Sachs predicts it will rise to $1.55 in a year from $1.39 at 4:23 p.m. in New York.

Every 10 percent gain in the euro on a trade-weighted basis reduces GDP growth by 0.8 percentage point, while also lopping about 11 percent off European corporate earnings, according to an analysis by Credit Suisse AG strategists last month. That leaves businesses including Paris-based LVMH Moet Hennessy Louis Vuitton SA, the world’s biggest luxury-goods maker, and Siemens AG of Munich, Europe’s largest engineering company, vulnerable to a stronger euro, they said.

A continued advance may ultimately force the ECB to follow the Fed and add more stimulus, said Stephane Deo, chief European economist at UBS AG in London. The ECB may broaden the collateral it accepts for loans or even cut its benchmark interest rate from 1 percent, he said, adding that there’s a “low probability” of more asset purchases.

“The ECB will follow suit, in one way or another, in order to keep the euro appreciation at bay,” Deo said. Nobel laureate Paul Krugman said in an Oct. 28 interview that the ECB should emulate the Fed and carry out quantitative easing. For now, Europe’s central bank will stay on hold, said David Mackie, chief European economist at JPMorgan Chase & Co. in London. Policy makers believe the economy doesn’t need more aid and that providing it would fan inflation and ease pressure on governments to clean up their balance sheets, he said.

Bundesbank President Axel Weber is even campaigning for an immediate end to the ECB’s bond purchase-program, a push Trichet rejected. The ECB’s buying already differs from other quantitative-easing policies because the central bank mops up the resulting liquidity, meaning the net effect on the money supply is neutral...

The BOJ’s Shirakawa said Oct. 28 that shifting the date of his policy meeting to this week from Nov. 15-16 wasn’t linked to the Fed. Rather, policy makers want to discuss buying ETFs and REITs sooner than originally planned, having already agreed last week to purchase corporate debt with lower credit ratings than they had previously purchased, he said.

A weaker dollar would still risk undermining the world’s second largest economy, with the yen’s surge to a 15-year high already prompting companies such as Toyota Motor Corp. to cut back. Japanese government securities rose on speculation the BOJ could use the meeting to loosen credit further, with the 10-year bond capping seven straight months of gains last week. The central bank will be “ready to take action after markets react to the Fed’s action,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo.

As a parting shot, let me reiterate what so many others have said: If the US has not been successful in resuscitating its economy with massively expansionary policies, there is little reason to believe that comparatively less enormous sums meant to do the same will do the trick. Recent stock market movements are quite inexplicable insofar as all this free money is likely helping fuel a stock market bubble that fails to reflect the unlikely success of another round of easing.

UPDATE 1: As expected, the US has fired the first salvo with Fed intentions to buy $600 billion more worth of Treasuries to June 2011:

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

Unsurprising end result? The dollar is taking it on the chin. It's your move next UK, EMU, and Japan as the US clearly aims to weaken its currency.

UPDATE 2: The Bank of England ain't doin' nuthin' in light of recent favourable data. It notes "The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion."

And turning to the focal point of the article above, the ECB isn't succumbing to American antics, either, simply stating "At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25% respectively."