Reading Robert Samuelson´s piece in today´s WAPO – The curse of the dollar?-, where he refers to Fred Bergsten´s recent lecture on ‘currency wars’ where he says “there are at least 20 countries that can be classified as ‘currency manipulators’”, I was reminded of this great dialogue from The Manchurian Candidate (1962):
Sen. Iselin: I mean, the way you keep changing the figures on me all the time. It makes me look like some kind of a nut, like an idiot.”
Mrs. Iselin: Well, you’re going to look like an even bigger idiot if you don’t get in there and do exactly what you’re told…Who are they writing about all over this country and what are they saying? Are they saying: “Are there any Communists in the Defense Department?” No, of course not, they’re saying: “How many Communists are there in the Defense Department?” So just stop talking like an expert all of a sudden and get out there and say what you’re supposed to say.
Mrs. Iselin: Would it really make it easier for you if we settled on just one number?
Sen. Iselin: Yeah. Just one, real, simple number that’d be easy for me to remember.
[Cut to Senate chamber]
Sen. Iselin: There are exactly 57 card-carrying members of the Communist Party in the Department of Defense at this time!
According to Samuelson/Bergsten:
It’s not just joblessness. Many Americans believe that foreigners have manipulated their currencies to enshrine their export advantage. In a recent lecture, economist Fred Bergsten of the Peterson Institute, relying on the work of his colleague Joe Gagnon, argued that at least 20 countries have regularly intervened in foreign exchange markets by buying dollars and euros “to keep those currencies overly strong and their own currencies weak, mainly to boost their international competitiveness and trade surpluses.”
There are too many things wrong with this kind of reasoning. In short, paraphrasing the now ‘famous’ “Don´t reason from a price change”, I would say “Don´t infer about a GDP component change”. It can easily lead one astray.
After FDR devalued the dollar in 1933 net exports dropped. In the last 10 months, although the yen depreciated by around 30%, the latest data show imports (‘surprisingly’) growing by more than double the growth in exports.
If the objective is to increase AD, that´s exactly the sort of result you can expect to get. The income effect trumps the relative price (terms of trade) effect. And given the weak level of world aggregate demand at present, so called ‘currency manipulation’ by many countries, the wrong label for ‘expansionary monetary policies’, is exactly what´s needed.
Maybe wanting to arrive at a round and easily remembered number like 20, Bergsten commits the ‘sacrilege’ of including ‘poor Denmark’ on the list. Obviously Denmark is not poor, only in the sense that it´s ‘contractually’ tied to the euro and so is ‘forced’ to buy and sell euros in order to keep the DKr/Euro rate constant (within a narrow band).
PS If I recall correctly, the term ‘currency manipulation’ was coined by the Brazilian Finance Minister back in 2010, and was directed at industrial economies in general and the US in particular, saying that the effect of QE was to appreciate developing countries’ currencies, reducing their competitiveness.