Sound The Trumpet : As Fed Retreats from Stimulus, Central Banks Overseas Expand Theirs

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“As Fed Retreats from Stimulus, Central Banks Overseas Expand Theirs”
by The New York Times
October 3rd, 2014

On Thursday, students in Athens protested the cancellation of their transport service because of austerity measures.

WASHINGTON — As the growth of the United States economy outstrips the rest of the developed world, American policy makers are allowing Europe, Japan and even China to seek a little more prosperity — at the expense of Americans.

The Obama administration and the Federal Reserve have watched quietly in recent years as foreign governments and central banks have chipped away at the dollar value of their currencies, strengthening their export industries in the hope of stimulating their economies.

The trend is likely to intensify over the next year as the Fed retreats from its own stimulus campaign while the European Central Bank and the Bank of Japan expand their efforts. Mario Draghi, the head of the European Central Bank, said on Thursday that it would begin a new round of bond purchases this month.

The United States has long argued that markets should determine the value of currencies and criticized nations that try to manipulate exchange rates. The current silence reflects both the simple reality that the American economy needs less help than the rest of the developed world and the judgment of officials that the United States would benefit greatly from stronger global growth. That, they say, would be true even if, in the short term, it makes the country’s goods a little harder to sell and jobs a little harder to find.

With its economy slowing, China reverted to a policy of suppressing its currency. Credit Reuters

“You’re seeing American officials turn a blind eye to Mario Draghi talking down the euro, and turn a blind eye to interventions by the Chinese, because in both cases they’re making the judgment that having a stabilized situation and decent growth prospects in these countries is far more important,” said Adam Posen, president of the Peterson Institute for International Economics. “I tend to agree with that.”

American leaders have embraced and celebrated a strong dollar as evidence of a strong economy. It lets Americans buy more foreign goods and borrow more cheaply from foreign countries. It also may draw foreign investors to American financial markets, supporting the rise of asset prices.

But the rise of the dollar carries large risks, too. It makes it harder for American companies to sell goods and services. It may be contributing to the sluggish pace of domestic inflation. And some economists warn that letting the dollar rise is not a sustainable method of encouraging growth.

“A strong dollar, fueled by higher U.S. interest rates, will likely expose vulnerabilities in other parts of the world,” Stephen King, chief global economist at HSBC, wrote in a research note on Thursday. “Latin American countries already flirting with recession would certainly not welcome a tightening of U.S. monetary conditions.” Some economists said the United States should seek to limit the dollar’s rise through diplomacy and policy, and that the Fed should seek to limit its divergence from other central banks by extending its stimulus campaign.

A recent report by the Bank for International Settlements, essentially the bank for central banks, also questioned the global benefits of a stronger dollar, predicting it would tighten financial conditions because foreign banks rely heavily on dollar funding.

The Currency Game

The value of other major currencies has been falling against the dollar as foreign governments and central banks seek to stimulate their own economic growth at the expense of the United States.

Europe’s health. “It’s going to create some instability, but the alternative is worse,” said Mr. Cecchetti, former chief economist of the Bank for International Settlements. “You don’t want to be around if there’s a real depression in Europe.”

The central bank still has not fully deployed the arsenal of a modern central bank to improve growth in Europe. It has refrained from the large-scale purchases of government debt undertaken by the Fed, the Bank of Japan and the Bank of England.

But in recent months it has sought to push down the value of the euro through a variety of measures. In September, the central bank offered loans that were practically interest-free to commercial banks that promised to lend the money to businesses and consumers.

On Thursday, after a board meeting Naples, Italy, the central bank outlined a two-year plan to buy private sector assets, including bank loans packaged into securities. “These purchases will have a sizable impact,” Mr. Draghi said at a news conference after the meeting.

One euro, which bought $1.39 in April, bought only $1.26 at the end of September. “We needed to bring the euro down and we still need to bring the euro down,” Christian Noyer, a central bank board member from France, said in a recent interview with the French broadcaster Radio 1.

Aiming to fight low inflation and foster exports, officials have helped drive down the euro. Credit Yannis Kolesidis/European Pressphoto Agency

While such efforts are usually aimed at increasing exports, the central bank is focused on imports, too. A weaker euro raises the price of imported fuel and other products, which could help budge inflation. Prices in the eurozone last month increased at an annualized rate of just 0.3 percent, far below the 2 percent pace the central bank and other major central banks in the developed world regard as best for sustainable growth.

“This is a currency war where stealing inflation rather than growth is the goal,” economists at the British bank HSBC wrote in a report published on Wednesday. The question, they said, “is whether the U.S. economy can generate sufficient inflation internally to tolerate the deflationary impact of a stronger dollar.”

So far, American officials primarily seem frustrated that the European Central Bank continues to act slowly. James Bullard, president of the Federal Reserve Bank of St. Louis, last year became the rare official to call publicly for stronger action when he told an audience in Frankfurt that the central bank should buy government bonds.

Another question is whether the programs will provide a sufficient jolt. A similar lending program started by the Bank of England in 2012 has not reversed the decline in small-business lending in that country.

“Nobody’s hiring, nobody’s investing, nobody’s spending,” said Stefano Micossi, the director general of Assonime, an Italian business group. “There is no demand for credit. The system is not constrained by the funding side. The banks are awash in liquidity.”

Japan’s failure to reduce its trade deficit may show the limits of devaluation. Credit Everett Kennedy Brown/European Pressphoto Agency

Japan, which has been grappling with the problems confronting Europe for more than two decades, is also seeking growth through currency moves. Under the “Abenomics” stimulus campaign that Prime Minister Shinzo Abe began in early 2013, the Bank of Japan has agreed to double the money supply, and the price of yen in dollars has dropped by about 24 percent.

The results have not met expectations. Japan’s trade deficit has increased while inflation remains weak. The Japanese economy shrank by 7.1 percent in the second quarter after a sales tax increase.

The country’s struggles may show the limits of devaluation, according to Mr. Posen of the Peterson Institute. He noted that demand was less sensitive to small changes in price for the kinds of high-end goods that dominate the exports of Japan and other developed countries.

The government remains publicly committed to its stimulus campaign. But some analysts see signs of tension between the head of the bank, Haruhiko Kuroda, and politicians who are wary that the rise in import prices will provoke consumer resistance.

“Kuroda is much more powerful than other board members for sure, but not necessarily than politicians,” said Hiromichi Shirakawa, Japan economist at Credit Suisse in Tokyo and a former central bank official. “This is scary as the markets have been expecting additional easing by the bank within a couple of months.”

Counting renminbi at a bank in China. The currency has fallen about 2 percent against the dollar so far this year. Credit Carlos Barria/Reuters

China’s economic rise was built on the suppression of its currency to support cheap exports at the expense of domestic consumption. Then, beginning in 2010, China let the renminbi rise about 20 percent against the dollar as part of its effort to encourage a transition away from export-led growth. But this year, with the economy growing at the slowest pace in more than a decade, China once again pressed down on the renminbi. Its value has fallen about 2 percent against the dollar so far this year.

“It was a way to stimulate the economy without resorting to full blown credit and investment-driven stimulus,” said Diana Choyleva, the head of macroeconomic research at Lombard Street Research in London.

While that small change has prompted little criticism from the United States, the looming question is whether China will continue.

During the financial crisis, China’s government-controlled banking system pumped money into the economy, doubling its assets over a five-year period. Many companies and local governments are now struggling to repay those debts, and authorities are reluctant to treat the pain with another major burst of lending.

Looking for His glorious appearing! Titus 2:13