| By Liam Halligan
The Telegraph, London
Saturday, October 16, 2010 http://www.telegraph.co.uk/finance/comment/liamhalligan/8068335/Chinas-n... Last weekend's "currency war summit" ended in dismal failure. Future historians will wince. The annual meetings of the International Monetary Fund in Washington are supposed to generate some kind of resolution. Instead, all we got was posturing and a slew of pious speeches saying that "co-operation is crucial". What is now clear is that some of the world's leading economies are deliberately debasing their currencies in order to make their exports more competitive and lower the real value of the massive debts they owe the rest of the world. ... Dispatch continues below ...
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Tempers are rising, as are protectionist sentiments. Across the globe, governments are talking about "aggressive tariff barriers" and "trade retaliation" -- language that hasn't been used by mainstream peacetime politicians since the mid-1930s. Yet instead of knuckling-down and addressing the urgent task of building some kind of an agreement to contain a fully-blown currency conflict, world leaders last Sunday urged the IMF only to "study the issues", and "play a stronger role in monitoring how the policies of each member state affects the others." This was a pathetic response. The concluding statement of the fund's policy-setting committee meekly pledged to "work toward a more balanced pattern of global growth, recognising the responsibilities of surplus and deficit countries." To his credit, even the IMF's own managing director, Dominique Strauss-Kahn, labelled such language "ineffective." The governments controlling the IMF simply kicked the tough conversations into the long grass -- postponing them until the Seoul G20 summit in early November at the earliest. While policy at the global level is non-existent, the US and several other "advanced" nations, including the UK, are in the midst of a radical policy experiment that is about to get even more extreme. For most of last week, the dollar fell further on speculation that the Federal Reserve, having already bought $1,700 billion (L1,062 billion) of dodgy mortgage-backed securities and government bonds with newly-created money, will soon indulge in further "quantitative easing." As a result, the US currency hit record lows against the Chinese yuan, Swiss franc, Australian dollar and the Japanese yen. And, of course, that is just what America wants. Ben Bernanke, the Federal Reserve chairman, continued to fuel speculation that the US is about to unleash hundreds of billions of dollars more QE money. "There would appear -- all else being equal -- to be a case for further action," he said in a speech on Friday. Yet America's now-blatant policy of trying to print its way out of trouble, a ploy being copied by others, is far from proven and could actually make things worse: QE on the scale now being proposed has never been tried. It is beyond the realms even of economic theory. If banks in the US and elsewhere remain reluctant to lend, Western economies will stay in the doldrums and could tip back into recession. On top of that, there is a very real danger that renewed money printing drives up the price of oil and other commodities -- imposing serious damage on the QE nations, most of whom are importers of such key economic inputs. Crude is above $80 a barrel. With the price of copper and tin soaring, the London Metal Exchange price index last week hit a two-year high. Commodity prices are strong -- and rising -- even though Western demand remains sluggish because of economic weakness. There are, of course, solid reasons why the price of oil, metals, and other tangibles should stay firm -- not least the ongoing rapacious demand among emerging nations in Asia and elsewhere as they industrialise, build more infrastructure and their energy-hungry middle classes continue to grow. On the supply side too, with the credit crunch having starved the capital-intensive extractive industries of cash in recent years, there are fewer mining and drilling projects about to come on stream. But something else is going on. International investors, deeply alarmed by the Western world's wildly expansionary monetary policy and the related destruction in the value of paper currency, are starting to park their wealth in assets "that governments can't print more of." The obvious manifestation of this is the price of gold, which hit another record on Thursday. Silver has also just reached a 30-year high, and is set to scale $25 per ounce. Aside from precious metals, though, the nightmare scenario is that QE leads to a spike in the price of oil and other commodity imports needed to keep the Western world running -- as a result of investors using such assets as an "anti-debasement hedge." There are signs this is starting to happen. If the trend becomes stronger, and speculators pile in via commodity-related price indices and "exchange-traded funds," the result could be a commodity price run-up that shatters the already anaemic Western recovery. Were that to happen, central banks such as the Fed would huff and puff, spouting populist nonsense about "clamping down on speculation." But the reality is that high, and even spiralling, commodity prices are an absolutely rational response to QE. Such price rises would, in fact, cause a decline in real incomes in the very countries printing the money -- seeing as commodities and other tangibles are inputs into the goods and services we buy. These deeply counterproductive QE outcomes could very easily come to pass. Yet across the Western world, among politicians and media commentators, there is barely a whimper of protest about this reckless and unprecedented policy. Attention is focused instead on China and its "overvalued currency." Like a pantomime villain, the People's Republic is blamed for the West's economic woes. In August, America's trade deficit surged to $46 billion, its deficit with China alone hitting a record $28 billion. But to listen to most US politicians, you'd think such numbers had nothing to do with the fact that China makes a lot of goods the world wants and US exports in many sectors have become uncompetitive. Not least due to America's QE, the yuan has appreciated around 3 percent against the dollar since June -- when Beijing signalled an end to its "currency peg" regime. However, with crucial mid-term elections looming in early November, US legislators and union bosses are urging President Obama to take tougher action, blaming "Chinese trade distortions" for the loss of "millions of US jobs." China is hitting back. A government spokesman argued on Friday that it's "totally wrong to blame the yuan for the Sino-US trade imbalance" and urged America not to make China its "scapegoat." Imminent US legislation imposing retaliatory tariffs on China is almost certain to breach World Trade Organisation rules. Unless this standoff is defused, it can only end badly. So expect "currency manipulation" to be top of the agenda at the G20 summit. But don't expect much in terms of resolution. As South Korea's President Lee Myung-Bak says: "If the world fails to reach agreement on foreign exchange policy and insists on its own interests, it will bring about trade protectionism and cause very difficult problems to the global economy". Then again, South Korea has itself intervened heavily in currency markets in a bid to boost its exports. The QE end-game is impossible to foresee. While the dollar is falling for now, if commodities balloon then correct sharply the dollar itself could spike. Having said that, the long-term trajectory of the US currency must surely be down. The irony is that by implementing yet more QE, America may not do itself much good. It could succeed, though, in imposing chaos on the rest of the world.
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