One does not generally think of G20 communiques as hilarious, but Carl von Clausewitz might have been amused by the one put out over the weekend (Prussian military theorists are known for their sense of humor) and perhaps honored its comic genius with the above corollary to his famous maxim*. The document essentially re-classified recent competitive currency devaluation, without even calling out the tactic by name, as one of a variety of “policies implemented for domestic purposes,” on the part of G20 members seeking to “minimize” “negative spillovers” on other countries.
Got that? So when the Fed prints money to fund QE “infinity and beyond” and the dollar slides against the euro it’s just a “spillover,” as is apparently the effect of Japanese Prime Minister Shinzo Abe’s call for a weaker yen (precipitating a 20% dive) since he’s just trying to stimulate his “domestic” economy. Indeed, as market commentators seized on the G20 statement as a ratification of Japan’s devaluation policy, the point of the group’s statement became clear; one might paraphrase it as “hey, big advanced economies, we’re cool with you devaluing – just call it quantitative easing or monetary stimulus and try not to be too obvious in stating how low you want your currency to go.”
The problem, of course, is that for any nation that trades with the world, there really is no such thing as a purely “domestic” economic policy. For example, when a nation’s central bank creates currency to buy financial assets in quantitative easing, all that money printing can drive down the value of the currency versus that of the country’s trading partners, giving the QE the added stimulative kick of improving balances of trade and payments. The US may well be enjoying this effect, while Japan, facing monstrous energy-driven trade deficits in the wake of its post-Fukushima near-total nuclear shutdown, desperately wants to increase exports. Indeed, the newly-elected LDP government has entertained purchasing foreign bonds to flood the world with cheapening yen, though Abe downplayed the need for going this far following both the yen’s plunge and the G20 summit, perhaps fearing the optics at the moment.
The fall guys in a currency war tend to be the countries that don’t devalue, a point not lost on ECB president Mario Draghi, who only a few months ago stated his intention to “fully sterilize” Outright Monetary Transactions – his own quantitative easing – and prevent a decline in the euro, presumably by using foreign currency reserves to mop up the excess euros used to buy Eurozone bonds. That was a nod to inflation hawks like Bundesbank president Jens Weidmann, who fear currency debasement may lead to higher prices, but it was also before the G20 devaluation love-fest. Right after the summit, Draghi made clear that while he was not targeting a specific exchange rate (of course not – after all, he read the communique) he was cognizant of the “deflationary” effects of too strong a euro. Translation: “Hey folks – I’ve got a printing press, too!”
Of course, in a policy free-for-all like the one the G20 just had, there has to be something in it for everyone, including emergent economic powerhouses like the BRICs. Thus the comment about the need to “minimize” “spillovers,” including measures to prevent all that newly-created, developed-world “hot money” bidding up and crashing developing nations’ domestic markets as it roars in and out of their economies. In other words, the new kids on the block get a green light for currency controls.
Beggar thy neighbor devaluations, protectionist currency controls…this kind of thing can get very out of hand, with bad consequences, economic and otherwise. As the G20 expands the scope of this game, its members had better learn to play nice. After all, past competitions of this kind have preceded events which prove the veracity of von Clausewitz’s observation.
*“War is the continuation of politik by other means.” Then as now, the shadings of the translation of politik (policy or politics, depending on the translator) are both intriguing and ominous.