from the eocnomist
In the era of the classical gold standard, in the late 19th century, nations were governed by men drawn from the creditor classes. It was no surprise that sound money was their priority. But in an era of mass democracy, that is no longer the case. Few voters care about the exchange rate, but they do care about borrowing costs and jobs. Markets know this, givingthem an incentive to attackpegs that lackcredibility.
In the era of the classical gold standard, in the late 19th century, nations were governed by men drawn from the creditor classes. It was no surprise that sound money was their priority. But in an era of mass democracy, that is no longer the case. Few voters care about the exchange rate, but they do care about borrowing costs and jobs. Markets know this, givingthem an incentive to attackpegs that lackcredibility.
One reason for this divergence is the effect of investment flows. Most currency transactions have little to do with exports and imports. The daily value of worldgoods trade in 2013 was $52 billion; daily foreign-exchange turnover in the same year was $5.3 trillion, a thousand times larger. Investors are foreverswitching from one currency to another in search of a better return. A common tactic is the “carry trade”, borrowing money in a currency
with a low interest rate and investing theproceeds in a country with a higher one. Such huge flows of money make it harder
to maintain pegs.
to maintain pegs.
In some cases, such as Ireland, this increase merely reflects the fact that financial-sector debt has ended up on the government’s balance-sheet because of bank rescues. Shifting debt from the private to the public sectoris in some respects a positive step; governments can borrow at a cheaperrate than companies and individuals and, if they have their own currency, have considerable scope to expand their balance-sheets
The report has various proposals for reducing the impact of bad debts, such as shared-equity mortgages, which would enable lenders to enjoy some of the gains from higherhouse prices, in return fortaking some ofthe pain from lower ones. It is not clear, however, whether such an idea would take hold without official help. Lenders would surely charge higher rates
to compensate for the risk of loss. Reducing tax incentives for debt is another good idea, but one sure to meet fierce resistance, particularly in America, where tax relief on mortgages is regarded as a human right. After a while, like any feelgood drug, debt becomes addictive
Congressovertheissue.
In an article for Foreign Affairs magazine last month, Fred Bergsten of the Washington-based Peterson Institute for International Economics argued that a three-pronged, more aggressive US policy would be the “smart strategy”, whatever happened with the TPP. First, the administration should enforce existing law and restore its international credibility on the issue by
formally designating countries such as China currency manipulators. Second, any country manipulating its currency
should have its goods subjected to countervailing — or punitive — duties. And third, the US should be prepared to
wage war in the markets and use “countervailingcurrencyintervention”.
China buying a billion dollars to weaken its currency should be countered by a US move to buy the same in renminbi and maintain the status quo, MrBergsten argued in his article.
“A few implementations of this policy, or perhaps even just its announcement, should be enough to deter future currency manipulation,”he wrote. That approach is unlikely to become
US government policy any time soon. But in Washington, the politics of currencyarebecomingvolatileonceagain
to compensate for the risk of loss. Reducing tax incentives for debt is another good idea, but one sure to meet fierce resistance, particularly in America, where tax relief on mortgages is regarded as a human right. After a while, like any feelgood drug, debt becomes addictive
Congressovertheissue.
In an article for Foreign Affairs magazine last month, Fred Bergsten of the Washington-based Peterson Institute for International Economics argued that a three-pronged, more aggressive US policy would be the “smart strategy”, whatever happened with the TPP. First, the administration should enforce existing law and restore its international credibility on the issue by
formally designating countries such as China currency manipulators. Second, any country manipulating its currency
should have its goods subjected to countervailing — or punitive — duties. And third, the US should be prepared to
wage war in the markets and use “countervailingcurrencyintervention”.
China buying a billion dollars to weaken its currency should be countered by a US move to buy the same in renminbi and maintain the status quo, MrBergsten argued in his article.
“A few implementations of this policy, or perhaps even just its announcement, should be enough to deter future currency manipulation,”he wrote. That approach is unlikely to become
US government policy any time soon. But in Washington, the politics of currencyarebecomingvolatileonceagain
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