"In
1985, the five powers proved that policy controls could replace the mechanism
for semi-fixed exchange rates adopted at Bretton Woods. Since
then, the gears have jammed. … The erosion of American hegemony and the
ascension of China destroyed central political decision-making unity, which was
transferred from the G-5 to the G-20. Pomona, the goddess of abundance, has
given way to Mars, the god of war."
Pamona, the Roman goddess of abundance, in front of New York's Plaza Hotel. The days when agreements like the Plaza Accord could control global exchange rates are well and truly over.
The statue of Pomona, the Roman goddess of
orchards, a symbol of abundance, is situated right in front of New York's Plaza
Hotel. There, a quarter century ago, in September 1985, representatives from
the U.S., West Germany, Japan, France, and Britain signed the Plaza Accord, which
promoted the devaluation of the dollar by 50 percent against the deutschmark
and yen. Today, again, the global economy needs a weaker dollar. But there isn't
a common desire to make it possible to coordinate the monetary policies of the
powers.
The expansionary cycle terminated
by the fall of Lehman Brothers evolved under a sign of imbalance. The
compulsive savings of poor Chinese financed the exuberant consumption of the
America's middle class, a paradox reflected in the financial mirror by the
colossal financial surplus in China's current accounts and by the unsustainable
U.S. current accounts deficit. The ongoing crisis can be interpreted as a long-term
correction of this imbalance, with a reduction in the level of American
consumption and an increase in Chinese consumption. China, however, doesn't
appear likely to repeat the actions of the Germans and Japanese at the Plaza.
Beijing protects its currency
with a historically justified zeal. Yuan, a word that refers to a unit of
China's official currency, the renminbi,
is a contraction originating from the expression "round" - as in the
shape of a coin. Introduced at the end of the 19th century as a mimic of the
old Mexican silver pesos disseminated by way of the Spanish Philippines across
Southeast Asia, the renminbi cohabitated with Maoist ration cards and only achieved
a unified exchange rate in 1994.
Today, the Chinese government
fears that a rapid appreciation of the renminbi will speed the flow of
speculative investments and provoke a financial meltdown similar to the Asian
crisis of 1997. The precedent of an 11 percent appreciation of the renminbi, which
began in October 2007 and generated business bankruptcies and job losses,
doesn't help the few advocates of a new attempt. Furthermore, the predominant view
in the country is that a strong valuation would not reduce the U.S. trade
deficit, but simply shift exports to the Asian tigers.
Mellifluous, Chinese leaders
use "yes" to say "no." In June, pretending to yield to U.S.
pressure, China's central bank issued an ambiguous statement that pretended to
signal a relaxation of exchange controls. The text lacked substance - and the renminbi
barely moved. "We're all concluding that they don't believe we are
serious," complained Senator Jack Reed to U.S. Treasury Secretary Tim
Geithner. In fact, China's monetary authority is buying dollars at a tremendous
pace, sabotaging Geithner's attempt to produce a significant shock to the bilateral
exchange rate.
And the Chinese aren't alone.
Recently, after a long absence, the Japanese central bank returned to the currency
markets to sell 2 trillion yen, breaking a trend of Japanese currency appreciation.
The Swiss acted well before that, in the same direction, and quadrupled their foreign
currency reserves. The eurozone is a special case. The European Central Bank
(ECB) clings to the dogma of a strong euro, but not even the German export
machine can cope with the continued appreciation of the exchange rate three years
after the global crisis. A moderate depreciation would help reactivate the
weakest economies in the bloc and a controlled increase in inflation would
reduce the deficits that have plagued Greece, Portugal, Ireland, Spain and
Italy. An IMF
report indicates that the ECB already promotes the devaluation of the euro
against the dollar.
In the absence of coordinated
action to these major jolts, unilateral interventions from central banks
produces an alignment of exchange rates similar to those of two decades ago.
This scenario suggests a reassuring conclusion in which the global economy
escapes the chaotic spectrum of competitive devaluations. As evidenced by
recent statements, Brazil Finance Minister Guido Mantega hasn't fallen
for this tale. On one hand, there is the central anomaly of a weak renminbi [some
estimates suggest it is 40 percent undervalued]. On the other, the flow of
short-term capital pushes up the currencies of the larger emerging economies - notable
among these, Brazil. Instead of correcting the previous structural imbalance,
things are on track for the creation of new ones.
The root of the impasse is
geopolitical. The post-war monetary system lost its dollar/gold anchor in 1973,
but retained American leadership, which was expressed via the G-5 and provided
transparent agreements for exchange-rate controls. In the Plaza Accord, the
five powers proved that policy controls could replace the mechanism for
semi-fixed exchange rates adopted at Bretton Woods. Since
then, the gears have jammed. The current monetary system is an odd set of
exchange regimes that are grounded, flexible and managed, which covers a vast
monetary union and a number of currency boards. The erosion of American hegemony
and the ascension of China destroyed central political decision-making unity,
which was transferred from the G-5 to the G-20. Pomona, the goddess of abundance,
has given way to Mars,
the god of war.
Posted
by WORLDMEETS.US
So far, Brazil has operated
on the same line as the Japanese, Swiss and Chinese, avoiding a strong
appreciation of the real
by using bold investments in the currency markets. This defensive tactic is intended
to impede an explosion in the balance of payments deficit. But the incessant
accumulation of dollar reserves comes at a financial cost, which will soon prove
prohibitive. The alternatives are a reduction of domestic interest rates, which
would require cuts in public spending, and the imposition of controls on short-term
foreign investment, which implies counteracting high finance.
The
season of calm is coming to an end. Will the next government do the exact
opposite of what Lula has?
*Demétrio Magnoli is a sociologist
and Doctor of human geography at the University of Sao Paolo.
