The currency war lobby

About six months ago, when the world's major central banks all started pursuing aggressive strategies of quantitative easing, I blogged that, "the international bitching and moaning about QE3 seems much less than the 'currency war' rhetoric that QE2 triggered."

With Japan's decision to unleash the monetary taps, the "currency war" meme has cropped up again, but in an odd way. To be honest, I'm reading a lot more essays that smack down the "currency war" claim than are making it. For recent and salient smackdowns, see Felix Salmon, Mario Draghi, Gavyn Davies, Philipp Hildebrand, Matthew Yglesias, and Paola Subacchi

So this raises an awkward question -- who is claiming that there's a currency war and why? Is there a lobby that's agitating for an end to certain policies and using the guise of a "currency war" to try to make it happen? Who are these shadowy groups? 

As near as I can determine, there are three interest groups with the motivated interest in doing this: 

1) The Bundesbank. One can think of the eurozone crisis as one long, inexorable weakening of the Bundesbank's grip on European monetary policy. Bundesbank president Jens Weidemann set off the latest round of currency war puffery in a speech in which he bemoaned the "increased politicisation of exchange rates" and warned that central bank indepenence was eroding. Now I'm not a German-speaker, but it's possible that when Weidemann says central bank independence is "eroding" he means, "I don't have a veto over eurozone monetary policy like I used to and Draghi won't return my calls." 

2) The bond funds. Bondholders aren't big fans of inflating currencies, which is the designed effect of this collective round of quantitative easing. Or, to put it more pithily, it's not a currency war unless someone at PIMCO is hyping it!! In this case, Mohammed El-Erian

[T]here is a lot of scholarship demonstrating why such beggar-thy-neighbor approaches result in bad collective outcomes. Indeed, multilateral agreements are in place to minimize this risk, including at the International Monetary Fund and the World Trade Organization.

Yet, when push comes to shove, country after country is being dragged into abetting a potentially harmful outcome for the global economy as a whole. Worse, this process has not yet registered seriously on the multilateral policy agenda.

El-Erian needs to read the Financial Times a bit more often. The problem isn't that this isn't on the "multilateral policy agenda" -- it's that these global governance structures are less stressed about it than El-Erian: 

The world’s largest developed nations reaffirmed their commitment not to target exchange rates in a statement on Tuesday aimed at addressing concerns over a fresh round of global currency wars.

In a move widely seen as an attempt to defuse tensions over recent rapid moves in the currency market, the Group of Seven countries -- comprising the US, the UK, France, Germany, Italy, Canada, and Japan -- said they would “consult closely” on any action in foreign exchange markets.

"We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the ministers and governors said.

This doesn't sound like the G-7 is all that troubled -- or, to put it more bluntly, not as troubled as El-Erian wants them to be. 

3)  The developing world. While the G-7 seems pretty copacetic with the combined quantitative easing, the G-20 is another matter

The words “currency wars” are too blunt for a G20 communique, but that is what the world’s finance ministers will talk about when they meet in Moscow this week.

A new round of monetary easing in advanced economies is pushing down their currencies and prompting howls of protest from the developing world.

Indeed, the most cogent critiques of the developed world's combined QE strategy comes from officials and op-ed writers focused on the less developed world. And to be sure, the combined effect of developed country actions on the monetary front can create some policy problems in the developing world. 

Again, though, what's striking isn't the vocal complaints about currency wars in 2013 but the relative absence of them compared to, say, the fall of 2010 after QE2. Which suggests that while there might be some mild grumbling among the advanced developing countries, they prefer the status quo to policies that cause the OECD economies to contract in size.

So, to sum up: when you read about someone voicing "grave concern" about currency wars, see if they are based in A) an export-dependent developing economy; B) a bond fund; or C) the German central bank.  If they are, you can safely tune them out.  It's when people outside those places start carping that I'll start getting concerned about a currency war. 

Am I missing anything?


Whoppers of the Union

Fact-checking a decade's worth of the president's big speech.

As U.S. President Barack Obama prepares to deliver his fourth State of the Union address this Tuesday, it's worth commemorating the 10th anniversary of George W. Bush's infamous 2003 SOTU. In that address, Bush's "16 words" about Saddam Hussein pursuing Nigerien yellowcake led to ex post critical op-eds, which led to the politically motivated leaks, which led to the outing of covert operatives, which led to the prosecution of White House officials, which led to controversial presidential commutations, which ultimately led to book deals, Vanity Fair spreads, and movies starring Naomi Watts.

Nothing else said in the past decade's worth of State of the Union addresses has led to anything so extreme (or, insofar as Naomi Watts is concerned, as lovely), but it got us to thinking. It would be hard to prove that Bush knew he was distorting the truth when he uttered those 16 words. What other foreign or economic policy lulus did Bush and Obama say in their previous SOTUs? After a quick review, I was able to find at least two major whoppers in every State of the Union address in the past decade. Let's go to the archives!

The 2004 State of the Union address:

1.     "The men and women of Afghanistan are building a nation that is free and proud and fighting terror."

According to the Freedom House's 2013 Index, Afghanistan is rated as "not free." And according to Vision of Humanity's Global Terrorism Index, in 2012 Afghanistan ranked 3rd out of 158 countries in terrorist attacks. If Afghanistan is fighting terror, it's not doing a very good job of it.

2.     "Already, the Kay report identified dozens of weapons of mass destruction-related program activities and significant amounts of equipment that Iraq concealed from the United Nations. Had we failed to act, the dictator's weapons of mass destruction programs would continue to this day."

Bush was citing the Iraq Survey Group's October 2003 interim report. In the end, David Kay resigned from the Iraq Study Group after concluding that "we were almost all wrong" in Senate testimony. The Duelfer Report concluded that Saddam Hussein had in fact abandoned all WMD programs after the end of the 1991 Gulf War. Oops.

The 2005 State of the Union address:

1.     "It is time for an immigration policy that permits temporary guest workers to fill jobs Americans will not take, that rejects amnesty, that tells us who is entering and leaving our country and that closes the border to drug dealers and terrorists."

Eight years later, maybe -- maybe -- Bush's sense of urgency will be realized.

2.     "The beginnings of reform and democracy in the Palestinian territories are now showing the power of freedom to break old patterns of violence and failure."

At the insistence of the Bush administration -- and despite warnings from both Israeli and moderate Palestinian politicians -- elections were held in the Palestinian territories a year later, leading to a surprise victory for Hamas. Bush's freedom agenda wasn't vocalized so much after that.

The 2006 State of the Union address:

1.     "We're on the offensive in Iraq, with a clear plan for victory.... I am confident in our plan for victory. I am confident in the will of the Iraqi people. I am confident in the skill and spirit of our military. Fellow citizens, we are in this fight to win, and we are winning.

By December of 2006, the Iraq Study Group determined that the military situation on the ground in Iraq was "grave and deteriorating."The worsening situation on the ground helped trigger a landslide Democratic victory in November 2006, and eventually required a radical rethinking of counterinsurgency operations, leading to the "surge." Indeed, in his 2007 SOTU, Bush would detail at quite some length the worsening situation in Iraq.

2.     "The Palestinian people have voted in elections. And now the leaders of Hamas must recognize Israel, disarm, reject terrorism and work for lasting peace."

Seven years later, it appears Hamas is perfectly comfortable not recognizing Israel, conducting acts of terrorism, and rejecting any negotiations for a lasting peace.

The 2007 State of the Union address:

1.     "In the coming weeks, I will submit a budget that eliminates the federal deficit within the next five years. I ask you to make the same commitment. Together, we can restrain the spending appetite of the federal government and we can balance the federal budget."

You can insert your own fiscal joke here.

2.     "Iraq's leaders have committed themselves to a series of benchmarks to achieve reconciliation: to share oil revenues among all of Iraq's citizens, to put the wealth of Iraq into the rebuilding of Iraq, to allow more Iraqis to re-enter their nation's civic life, to hold local elections and to take responsibility for security in every Iraqi province."

It's worth remembering that the primary purpose of the surge was to give Iraqi politicians the space to achieve political reconciliation. While U.S. forces managed to achieve significant military successes, it would be hard to argue that Iraq's leaders achieved any of these commitments.

The 2008 State of the Union address:

1.     Next week, I'll send you a budget that terminates or substantially reduces 151 wasteful or bloated programs, totaling more than $18 billion. The budget that I will submit will keep America on track for a surplus in 2012."

In the fiscal year 2012, the Congressional Budget Office estimated that the United States had a federal budget deficit of more than$1 trillion.

2.     "We're working for a successful Doha Round of trade talks, and we must complete a good agreement this year."

The Doha Round is as dead as a doornail, and Bush's last trade representative recommended proclaiming it as such three years after this SOTU.

The 2009 State of the Union Address:

1.     "I intend to hold these banks fully accountable for the assistance they receive, and this time, they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer. This time, CEOs won't be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet."

AIG, which received more than $180 billion in government money, nevertheless paid out substantial bonuses to top corporate officials later in 2009.

2.     "To overcome extremism, we must also be vigilant in upholding the values our troops defend --because there is no force in the world more powerful than the example of America. That is why I have ordered the closing of the detention center at Guantanamo Bay..."

Gitmo remains open to this day.

The 2010 State of the Union address:

1.     "Rather than fight the same tired battles that have dominated Washington for decades, it's time to try something new."

Again, insert your own joke here.

2.     "We have gone from a bystander to a leader in the fight against climate change."

Three years later, even supporters of the Obama administration acknowledge that not much was accomplished in the first term on climate-change policy.

The 2011 State of the Union address:

1.     "Half a century ago, when the Soviets beat us into space with the launch of a satellite called Sputnik, we had no idea how we would beat them to the moon. The science wasn't even there yet. NASA didn't exist. But after investing in better research and education, we didn't just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs. This is our generation's Sputnik moment."

Google Trends suggest that if there was a "Sputnik moment," it came and passed very quickly.

2.     "In the coming year, we'll also work to rebuild people's faith in the institution of government."

Gallup data suggests that President Obama did not succeed in that task in 2011. To be fair, Congress certainly helped.

The 2012 State of the Union address:

1.     "[In the Middle East] we will stand against violence and intimidation. We will stand for the rights and dignity of all human beings --men and women; Christians, Muslims, and Jews. We will support policies that lead to strong and stable democracies and open markets, because tyranny is no match for liberty. And we will safeguard America's own security against those who threaten our citizens, our friends, and our interests."

One would be hard-pressed to describe the administration's Syria policy as standing "against violence and intimidation," or its performance in Benghazi as protecting "America's own security against those who threaten our citizens."

2.     "[A]nyone who tells you that America is in decline or that our influence has waned doesn't know what they're talking about."

The Pew Global Attitudes project suggests that either a lot of the world doesn't know what they're talking about, or that President Obama was wrong.

Let's see what he's got cooked up for us this year....

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