- The G-20 came to an agreement regarding currency valuations, but much of it was vague and nonbinding.
- US Treasury Secretary Geithner unsuccessfully called for G-20 member countries to stop manipulating their currencies and proposed trade targets to alleviate global imbalances.
- Ultimately, currency movements are, by and large, determined by economic fundamentals—and in most cases, very difficult to resist.
The G-20 group of nations got busy this weekend drafting an agreement on currency valuations. And, for a change (okay, not really), the end result was completely vague and nonbinding.
Politically fashionable of late, US Treasury Secretary Tim Geithner called for G-20 member countries to stop manipulating their currencies. Luckily, the US's proposed trade targets to alleviate global imbalances didn't make it far. That exports are somehow preferable to imports is an antiquated mercantilist idea best consigned to history. Time and again, free trade has proven to be a far superior (and usually mutually beneficial) strategy.
The recent currency ruckus was kicked up as various countries (from Switzerland, to Japan, to Brazil) moved to prevent currency appreciation and protect exports. Thus far, these efforts have been short-lived and ineffectual. Long-term currency controls demand sacrificing the efficacy of other monetary tools—and few big developed countries are rightly willing to go there.
China is a country that pegs its currency. But even China has loosened controls on the renminbi lately. Though not because the G-20 told it to, but because a freely floating currency is increasingly in its interest. (Funny how that works.) The Chinese appear to be moving down a more sustainable, freer economic path, bolstered by domestic demand—and confirmed by the country's upcoming 12th Five-Year Plan (early details were released last week). China will likely continue to allow the renminbi to rise, but at the government's chosen pace—US, European, or G-20 pressure notwithstanding.
Though some countries do control their currencies, few find such a strategy sustainable in the long term. And for the vast majority, near-term currency movements are determined simply by demand shifts. Or, another way to think about that, shifting sentiment. For example, the Brazilian real has strengthened on fast growth and relatively high interest rates—forces that its recent foreign investment tax has yet to significantly deter. Though many blame the dollar's movement on the Fed, that's probably not exactly right. The Fed's monetary policy has been pretty consistent all year. What changed? The "safe haven" US dollar strengthened earlier when the world fretted a PIIGS-related euro meltdown. When the eurozone failed to implode and the PIIGS' fate seemed much improved, sentiment flip-flopped. US double-dip worries emerged—and the dollar weakened. This currency back and forth will continue—always does—but doesn't seem likely to boast the power to stop the bull market or economic recovery.
Despite politicians' best intentions, the idea of economic equilibrium is fiction—if the free market has never settled in a so-called equilibrium, don't count on politicians to find it. Preventing the market's natural fluctuations is by far a greater evil than allowing short-term "distortions" to work themselves out.