IMF Report calls for US Dollar devaluation

[macaroni21]

http://news.smh.com.au/breaking-news-world/imf-says-weaker-dollar-would-help-global-growth-20110224-1b5yd.html

 

Sydney Morning Herald, 24 Feb 2011

 

IMF says weaker dollar would help global growth

 

The International Monetary Fund called for a weaker dollar to help the United States reduce its deficits with the rest of the world and rebalance the global economy, in a report released Wednesday.

 

In the report prepared for a Group of 20 finance chiefs meeting last week, the IMF said that its calculations showed the dollar remains "on the strong side" of medium-term fundamentals, while the euro and the Japanese yen were "broadly in line" and several Asian currencies, including China, were undervalued.

 

To address global imbalances, the G20 should allow the dollar to fall, the Washington-based institution said.

 

"Some further real effective depreciation of the US dollar would help ensure a sustained decline of the US current account deficit towards a level more consistent with medium-term fundamentals, helping to support more balanced growth," the IMF said.

 

The widening US current account deficit -- a broad measure of trade in goods, services, income and payment -- rose a fifth straight quarter in the third quarter last year, to $127.2 billion, according to the latest US official data.

 

The issue of a weak dollar is particularly sensitive in Brazil, where the government has said an international "currency war" is under way with the United States pumping cheap US dollars into its post-crisis economy, while China's yuan sinks in tandem.

 

The IMF report was provided to finance ministers and central bank governors of the G20 major developed and emerging economies for their meeting Friday and Saturday in Paris.

 

The G20 countries reached agreement on a series of economic indicators to measure imbalances within and between countries, with the goal of helping nations avoid a repeat of the problems at the heart of the 2008 financial crisis.

 

The IMF urged stepped-up G20 efforts to sustain the global economic recovery, citing elevated downside risks for advanced economies and "overheating" in some emerging economies.

 

Among the threats to global growth, the IMF highlighted "insufficient progress in developing medium-term fiscal consolidation plans, especially in the United States and Japan" and "sovereign and banking sector risks in the euro area periphery."

 

In emerging economies, the key policy challenge is to keep overheating pressures in check and respond appropriately to capital inflows, the IMF said.

 

"In key surplus economies, overheating pressures can be alleviated by permitting currency appreciation, facilitating a healthy rebalancing from external to internal demand."

 

The 187-nation institution also said it "appears highly unlikely" the United States would be able to meet its commitment to halve its budget deficit between 2010 and 2013, pledged at a G20 Toronto summit in June 2010.

 

 

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http://www.straitstimes.com/STForum/Story/STIStory_638975.html

 

Straits Times, 26 Feb 2011

 

Sensible call to devalue US dollar

 

THE International Monetary Fund (IMF) has finally advocated - in a report presented to the G-20 meeting of finance ministers in Paris last week - the devaluation of the US dollar to help correct the United States' current account imbalance with the rest of the world.

 

Professor Lim Chong Yah of Nanyang Technological University has long advocated such a view with the caveat that other countries should not devalue their currencies in tandem with the greenback, unless they, like the United States, have a persistent balance of payment deficit.

 

An accompanying devaluation by other countries will trigger a global disaster as nations race to out-devalue one another.

 

Devaluation should be predicated on the Geithner Rule - named after current US Treasury Secretary Timothy Geithner - that devaluation should happen only if a country suffers a persistent negative of more than 4 per cent of gross domestic product (GDP).

 

The rule will exclude many countries such as Japan, China, South Korea and Thailand from the devaluation process.

 

Concurrently, the US position that the current global imbalance is owing mainly to the undervaluation of the Chinese yuan has two flaws.

 

One, it does not explain why the US has large balance of payment deficits with nearly every major economy.

 

Two, it also does not explain why many countries, including industrialised Japan and South Korea, as well as primary exporters like Australia, Malaysia and Saudi Arabia, can still have sizeable balance of payments surpluses with China.

 

The IMF should be congratulated for finally recommending a mutually beneficial orderly exchange rate adjustment mechanism for the world.

 

Dr Sng Hui-Ying

Research Associate in Economics

Nanyang Technological University

[Guest voldemar]

This is absolute bs. IMF and Tim Geithner has no credibility. No country in the world ever prospered by devalueing its currency. US needs new President and responsible fiscal policy.

[Guest Thor69]

Tim Geithner doesn't pay his taxes on time! Who would think he has credibility. Weak weak-spined politicians have caved on handling the deficit and overspending.

 

Politicians like to blame it on entitlements when the real problem is needless wars that seem to never end. Paying five billion dollars a month for wars is insane!

[Bob]

While I won't sit in praise of the IMF's history or achievements (or failures), equating the IMF with Geithner is a bit inane. The IMF is an international organization run by a director (he's from France) and three other top officials (one from the US, one from Brazil, and one from Japan).

 

Suggesting that US fiscal or economic policy has been a disaster (which it has been for decades) is a far different cry than dealing with the substance of what the IMF is recommending. And anybody thinking that the US fiscal or monetary policy has been bad only for the last 2 years and one month (that's how long Geithner's had any influence) is also a bit naive.

 

What's good for the IMF isn't necessarily what's good for the US but, then again, the IMF's job isn't to spout or support US policy. Rather than saying the devaluation suggestion is a bad idea (which apparently it isn't from the IMF's point of view), I take it more of confirmation that the US fiscal and economic policy for the last 40 years has been awful. Rather embarrassing that the world thinks you should devalue your currency because you can't keep your books in order.

[Guest]

No country in the world ever prospered by devalueing its currency. US needs new President and responsible fiscal policy.

1 Ideally prosperous countries do not devalue their currencies. However, when countries have run large unsustainable trade deficits for a very long time, currency devaluation is necessary to correct that imbalance.

2 Looking from overseas, I note that neither the current nor the previous President seem to have much idea about responsible fiscal policy. Which of the political parties will actually eliminate the budget deficit?

[Guest voldemar]

equating the IMF with Geithner is a bit inane.

 

 

And Who is equating Geithner and IMF? You need to read Macaroni post in his entierty and I quote from that post:

Devaluation should be predicated on Geithner rule...

 

And the rule is equally idiotic as IMF recommendation. Also, I do not say in my post that current President is the only one responsible for the current disaster. But his contribution already supercedes anyone before him by huge margin and it is pretty clear that he is "on steady path". Therefore we need a new President. I hope it will not be Sarah Palin. However, if the choice is between Sarah Palin and Barack Obama I will vote for Sarah Palin...

[Guest]

However, if the choice is between Sarah Palin and Barack Obama I will vote for Sarah Palin...

 

Count yourself lucky, the US does not have anything like the UK Labour party. That lot haven't learnt ANYTHING from the failure of communism.

[Guest Thor69]

if the choice is between Sarah Palin and Barack Obama I will vote for Sarah Palin...

 

 

Sarah Palin is not qualified to be president. Every time she opens her mouth she puts both feet in it. Honestly, you just can't fix stupid!

[Guest voldemar]

1 Ideally prosperous countries do not devalue their currencies. However, when countries have run large unsustainable trade deficits for a very long time, currency devaluation is necessary to correct that imbalance.

 

There is no rigorous law that states that. There is a line of economic thought that suggests that but there are other lines of thought equally if not more respected.

You do not need to take my word on that just look how things play out in Europe...

If the country has a huge debt denominated in its own currency, then its devalue is tantamount to default and who is going to continue to fund defaulted country?

[Bob]

Sarah Palin is not qualified to be president. Every time she opens her mouth she puts both feet in it. Honestly, you just can't fix stupid!

 

Lol....and quite true. I used to refer to GW being "dumber than a stump" but he'd almost be a Fulbright scholar compared to Palin.

 

Many people have short memories and I am amazed at times how we criticize any politician just because something happened on their watch. Saying Obama's fiscal and monetary policy - viz-a-viz what's good for the US economy for the long term - have been disasterous is probably fairly correct; however, what he got dumped on his plate two years ago last month is hardly his fault at all [Hmmm. Just who's fault could that be? Perhaps the economic stupidity of prior Presidents and Congresses?] and I for one think that Obama had very little choice as to what he's done. In fact, some could even argue that the current administration could be praised for avoiding an even more horrific economic disaster (one which, frankly, I'm surprised that the US didn't suffer....but I suppose there is still time to take that final plunge).

 

Basic economic theory will tell you that any nation running a long-term imbalance of trade - which ultimately means that foreign nations end up with a whole ton of paper dollars - leads to a weakening/devaluation of those dollars. And increasing the number of them leads to the same direction. It's been going on for decades and, while embarrassing, the IMF is only spouting the obvious. Devaluation will happen under these circumstances regardless of what any entity or politician says.

 

Back to the notion of supporting Palin over Obama. Unbelievable. I personally wouldn't vote for Palin for dog catcher. And I was actually rather pleasantly surprised that even the Republicans apparently won't either given the results of the last two straw polls. Thank god or somebody.

[Guest fountainhall]

What I find fascinating about the Report is that it seems to trash the idea proposed by most US legislators that China should revalue its currency.

 

"Concurrently, the US position that the current global imbalance is owing mainly to the undervaluation of the Chinese yuan has two flaws.

 

"One, it does not explain why the US has large balance of payment deficits with nearly every major economy.

 

"Two, it also does not explain why many countries, including industrialised Japan and South Korea, as well as primary exporters like Australia, Malaysia and Saudi Arabia, can still have sizeable balance of payments surpluses with China."

 

These seem to me to be pretty powerful arguments. Australia and Saudi Arabia may have raw materials that China is now gobbling up wherever it can. But how do non-raw maerial countries like Japan and Korea achieve balance of payments surpluses?

[Guest]

But how do non-raw maerial countries like Japan and Korea achieve balance of payments surpluses?

Through a very competitive manufacturing sector and a deeply ingrained preference to buy products made in their own country wherever possible. If Hyundai want some western technology on their cars, they don't just buy it off the likes of Bosch, rather they license the technology to a Korean manufacturer. 5~20 years later, that company will have it's own technology.

 

However, the Japanese trade surplus will reduce if the Yen continues at it's high level.

Historically, Japan also tried to keep the Yen weak to boost exports, although I believe that policy has not been so obvious in the last 20 years.

 

As for the question of who will buy government debt when the currencies are regularly devalued? Well there are plenty of examples of this.

Remember the Italian Lira? That didn't stop them amassing a large government deficit.

The British Pound has lost value over a long period of time too, but that's not stopped our governments borrowing.

I wouldn't buy their debt, but this has never stopped other people from doing it.

[Guest voldemar]

What I find fascinating about the Report is that it seems to trash the idea proposed by most US legislators that China should revalue its currency.

 

 

US legislators are not position to decide what should China do with its currency.

It is plainly absurd that the country which depends heavily on China financing of its deficits try to dictate conditions to the lender.

Many US legislators live in fantasy world which is crumbling as we speak. China revalued its currency by 20 percent vis-a-vis US dollar during recent years and

it did not effect a tiny bit US trade deficit with this country.

IMF does not state obvious as Bob suggests . IMF states what US wants them to state, plain and simple.

There are two ways to proceed for US: either debase Dollar and leave the creditors with

huge amount of trash paper or introduce adequate austerity measures (that roughly correspond to Keinsian and Austraian school of thought in economics). Both approaches mean a lot of pain for Americans but they are not equivalent. Under Keinsian approach everybody ends up with nothing and in deep shit. It appeals to many who are already in this state (remember Karl Marx manifesto: Proletariat has nothing to loose except for its chains). By the way the phrase "everybody has nothing and in deep shit" provides

accurate characterization of Marxism IMHO. In case of austerity approach money preserve their value and those who have savings and those who live on fixed income (including vast majority of retirees) end up in much better shape. Marxists and so-called "Progressists" (who are not far from Marxists) argue that Austrian approach benefit wealthy who are not sacrifice enough. But very wealthy will be fine under almost all

circumstances.

Everyone in US should realize that we are on the edge of abyss, the crisis is not somewhere in the future, it is happening as we speak. Ask yourself: Do you want to be in deep shit with nothing or have a decent retirement? Even if "the price" of the second outcome is that some wealthier people will preserve some of their wealth (and many of them work hard for that, believe it or not).

What do you choose: to step on your "ideological swan song" and vote for "monstre"

Sarah Palin (or hopefully somebody much more reasonable like Matt Romney) or allow the free fall in the state described above(deep shit) but with gays openly serving in military with "progressist" Obama.

[Guest]

US legislators are not position to decide what should China do with its currency.

 

I disagree. Free Trade should involve exchange rates that are set by the market, not fixed by one country as currently happens in the case of China.

 

In principle, China should have no greater influence on the Yuan-$ exchange rate than the US. However in practice it's decided entirely by China.

 

Introducing tariffs for any country that fixes it's exchange rate at an unfair level seems like a perfectly logical way forward.

[Guest fountainhall]

Through a very competitive manufacturing sector and a deeply ingrained preference to buy products made in their own country wherever possible

Sorry, my summary question specifically related to an earlier point in the Report -

 

it also does not explain why many countries, including industrialised Japan and South Korea, as well as primary exporters like Australia, Malaysia and Saudi Arabia, can still have sizeable balance of payments surpluses with China.

I can understand that Japan and Korea buy a lot of their own locally produced products. But how is it they run major trade surpluses with China at current Yuan rates, and the USA runs major deficits?

[Guest voldemar]

 

 

In principle, China should have no greater influence on the Yuan-$ exchange rate than the US. However in practice it's decided entirely by China.

 

Introducing tariffs for any country that fixes it's exchange rate at an unfair level seems like a perfectly logical way forward.

You are correct on that one. It is decided entirely by China. Your point that exchange rate

should be decided through market mechanism, in principle, is the right one. However, how can you seriously talk about that when Bernanke prints money at his wish. Notice, that nobody elected Bernanke: he just a bureaucrat appointed by Bush and reappointed by Obama

(and confirmed by Senate).

In case of US Dollar (as a world reserve currency), things are even more complex than they look. E.g. Middle East oil reach countries peg their currency to US dollar,

so does HK. Panama and Ecuador use US dollar as their official currency. So, why China cannot peg Yuan to US dollar and Saudi Arabia can? And why nobody suggest that tariffs should be introduced for oil coming from Saudi Arabia? (The answer: because Saudi peg makes oil cheaper for US and it is considered to be good). By the way, there are serious economists that argue that various pegs lead to the situation where trade deficits should be counted within currency zones. I saw calculation that shows that if one combines China and US in single currency zone (assuming that Yuan is pegged to US dollar

which is not exactly right) the combined zone has a trade surplus with the rest of the world and hence (according to Bob) elementary economic theory should imply that Dollar should be a strong currency...

The truth is that Economy (unlike , say, Mathematics) is not exact science and one cannot draw conclusions like that with any kind of rigor.

[Guest]

However, how can you seriously talk about that when Bernanke prints money at his wish.

Allowing the exchange rate to rebalance by market forces should weaken the dollar & reduce it's value, which is exactly what should happen when they're printing them off like toilet paper.

 

And why nobody suggest that tariffs should be introduced for oil coming from Saudi Arabia?

The sensible thing for the US to do would be to increase taxes on all domestic oil consumption, thereby encouraging efficiency improvements. We've seen that for petrol & diesel in Europe, although generally not for domestic heating oil & gas.

[Guest fountainhall]

Allowing the exchange rate to rebalance by market forces should weaken the dollar & reduce it's value, which is exactly what should happen when they're printing them off like toilet paper.

Isn't the US in a Catch-22 situation, though? Vast quantities of its paper are owned by China and a few other nations. Let the dollar go down much further and the Chinese are not going to buy much more. In fact, from what I read, they are already in the process of selling some. And shouldn't that drive the dollar down further?

[Bob]

Isn't the US in a Catch-22 situation, though? Vast quantities of its paper are owned by China and a few other nations. Let the dollar go down much further and the Chinese are not going to buy much more. In fact, from what I read, they are already in the process of selling some. And shouldn't that drive the dollar down further?

 

Yep. And maybe it's China that's in the Catch-22 situation too (by selling off dollars, they help lower the value of the huge amount they still haven't sold yet!). Then, again, I never understood over the last decade why they were holding tons of US Treasury bills anyway as they were earning maybe 3-4 percent on average and losing 6-7% value at the same time (annually).

[macaroni21]

I never understood over the last decade why they were holding tons of US Treasury bills anyway as they were earning maybe 3-4 percent on average and losing 6-7% value at the same time (annually).

 

Because it kept their factories humming. The Chinese govt calculated which was the worse evil

- Losing a few percentage points a year on their holdings of US Treasuries, or

- Destabilising their export industries leading to lay-offs and worker unrest.

 

To Beijing the second was the scarier scenario. They chose to pay the price of the first.

 

But that is now becoming history. In the last few months the Chinese have finally reached some kind of consensus among themselves that they will have to take some drastic action to redirect their own economy to domestic consumption, for a complex of reasons which I won't go into here.

 

The Chinese will continue to lend to the Americans to enable them to buy Chinese-made goods. Beijing needs to keep the factories humming through the transition while China remakes its economy. But I also think the Chinese will be more aggressive in using their US Dollar holdings to

- buy assets from around the world, and

- influence US foreign policy (latest Wikileaks have already revealed one example).

[Guest]

Isn't the US in a Catch-22 situation, though? Vast quantities of its paper are owned by China and a few other nations. Let the dollar go down much further and the Chinese are not going to buy much more. In fact, from what I read, they are already in the process of selling some. And shouldn't that drive the dollar down further?

 

That's exactly what should happen, if all the currencies concerned floated freely.

[Guest loneranger]

However, if the choice is between Sarah Palin and Barack Obama I will vote for Sarah Palin...

You sure smell like a republican. (Personal Attack removed by Admin)

[Guest voldemar]

Bet you hate yourself too.

I consider this a personal attack. Can we keep our discussion on civilized level?

Moderators, please act.

[Guest voldemar]

Then, again, I never understood over the last decade why they were holding tons of US Treasury bills anyway as they were earning maybe 3-4 percent on average and losing 6-7% value at the same time (annually).

I think Macaroni answered your question. But, in principle, savvy investors make tonns of money on US bonds. There is a guy Gary Schilling who over the years helped his clients

to get returns up to 40 percents per year purely on US bonds. As Gary explains he never cared about yields. He typically plays on the fact that, if, say interest rates go down,

the value of bonds go up. It is very easy to play this game through various ETFs even without holding actual bonds. Leveraging this , one can get the mentioned return.

Of course, under certain circumstances, it is not so easy to predict the direction

of bond prices but over the last decade his strategy on average worked fine. I doubt though whether it will work for near future (though at the moment the US bonds prices do go up).

[Guest voldemar]

This is from zerohedge.com:

 

 

 

In a surprising turn of events, today's biggest piece of news received a mere two paragraph blurb on Reuters, and was thoroughly ignored by the broader media. An announcement appeared shortly after midnight on the website of the People's Bank of China. Reuters provides a simple translation and summary of the announcement: "China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency's international role. In a statement on its website www.pbc.gov.cn, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily." To all those who claim that China is perfectly happy with the status quo, in which it is willing to peg the Renmibni to the Dollar in perpetuity, this may come as a rather unpleasant surprise, as it indicates that suddenly China is far more vocal about its intention to convert its currency to reserve status, and in the process make the dollar even more insignificant.