David Sanger and Michael Wines report on growing international currency agità as leaders around the world seem to slowly reach the conclusion that devaluation is the only politically tractable method of boosting aggregate demand:
It is unclear if the result will be a “currency war,” as Brazil’s finance minister recently warned, or if these are just warning shots, fired to force Beijing’s leadership to make good on years of promises that it would allow the value of its currency to appreciate.
But that question is so in the air that Treasury Secretary Timothy F. Geithner felt compelled last week to try to dampen the fear. “We’re not going to have a trade war,” he said at a forum sponsored by The Atlantic. “We’re not going to have currency wars.” He acknowledged that the only way to break the cycle was for a country “to decide it is in its own interest to allow its currency to appreciate in response to market forces,” and he said he believed that a “substantial fraction of the Chinese leadership” now understands the need to allow the currency to rise in value.
I think that to assess whether or not we’re going to have currency wars you’d need to know what “currency war” really means, which is unclear. But there are basically two means at the disposal of major countries looking to unilaterally devalue their currency. One is the traditional and not very effective practice where your central bank sells dollar-denominated assets and buys euro-denominated assets. Or sells yen and buys dollars. Whatever. The other, which works better, is to do an unsterilized foreign exchange intervention. In other words, you do what the Bank of Japan did recently and print yen and then sell it. As Barry Eichengreen has been arguing for some time, if the major developed economies all do this at once it could do a great deal to boost growth.
If I was to write down in order the list of stimulative policies that I’d like to see, a series of competitive devaluations achieved through unsterilized foreign exchange interventions would be pretty far down the list. It would be chaotic, is needlessly complicated compared to printing money and handing people the money, and is still missing the element of explicit targeting that we really need. But it’s better than nothing.