We’re From The IMF and We’re Here To Calm You Down

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Quotable

Half the work that is done in this world is to make things appear what they are not.

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E.R. Beadle

 

The International Monetary Fund today released its latest forecast for global economies. Most notably, they revised lower their expected global GDP forecast for 2013: 3.5% vs 3.6% (Oct. est.)

But please, please don’t worry … because the IMF had plenty more to say. Paraphrasing Reuters’ newsfeed:

 

  • Even though downside risks remain significant, policy actions have lowered acute risks in the euro area and the United States.
  • The US should agree to raise the debt ceiling, put off excessive fiscal consolidation, and focus on tax and entitlement reforms.
  • If risks do not materialize then global growth could actually be stronger than forecast.
  • Fiscal stimulus and monetary easing, plus a weaker yen, will boost Japan’s economy.
  • Policy easing in emerging economies has helped to boost growth.
  • Developing Asia will remain the fastest-growing region in the world.
  • And the IMF’s Chief Economist has said ‘currency wars’ rhetoric is overblown.

 

Phew!

Downward growth revisions and crisis risks and all this talk of currency wars was beginning to sound scary.

But the IMF seems relatively reassuring, so things should be fine. But if one were looking for more reassurances, Germany’s Finance Minister is out today suggesting the G20 and G7 meetings offer a forum where countries can sort out potential competitive devaluations.

Now, if the wool is over your eyes … leave it there. Because out in the real world you have growing mistrust and threats to the global economic process popping up all over the place.

As has been the case for four years now, the eurozone is somewhat of a microcosm of the global economy. And we see tensions building rapidly inside the zone as national parliamentary leaders no longer see incentives of the common currency system as the disincentives grow stronger.

It seems to boil down to Germany versus everyone else. Blame for most of the tension is being placed squarely on the shoulders of Germany. They have the final say in ECB decisions and Germany’s austerity demands are highly unpopular. A difference in perspective, as it pertains to the future of the eurozone, is leading to a butting of heads between Germany and France.

All the while Germany now has to battle the two-headed beast forming in Japan. The Bank of Japan and the Japanese government are officially joining forces in an effort to devalue the Japanese yen and target economic growth rates.

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Ironic as it may seem, Germany doesn’t like the idea of a central bank forfeiting its independence in an effort to competitively devalue the currency. Germany’s concern makes sense: a rising euro relative to other major currencies hastens and exacerbates the eurozone’s problems.

South Korea isn’t too happy about the latest efforts out of Japan as the falling yen saps Korea’s competitiveness. One of the IMF’s warnings is that emerging economies have little room left for policy easing. Basically, once these smaller central banks can’t match the accommodative policy of the Fed, ECB, BOJ and BOE, the potential for instability in emerging markets grows quickly.

And speaking of the Bank of England, they’ll be getting a new governor in a few months. The Bank of Canada’s chief, Mark Carney, is hopping across to pond to replace Mervyn King. It is expected Carney will embrace some form of QE that directly targets the economy as the BOJ has just done and the Fed has done with its employment target.

Britain’s Prime Minister has just called for reforms in the European Union and has promised a referendum on the UK’s EU membership. They’ll vote on whether the UK stays in or gets out.

Now, this vote is promised to happen by 2017. And yes, that is a lifetime away. But already Germany is trying to preempt the potential severance. Despite the fact Germany is hoping to acquire more influence as they broker Eurozone recovery measures, they need an integrated EU to help that process along.

Back to Japan real quick – they are involved geopolitically with China over a dispute regarding the Senkaku Islands. Japan has made clear its intentions to beef up its military. China has too.

Meanwhile, China is deep into it with other Asian nations as it pertains to the South China Sea. The inroads the US has made into these other Asian nations could eventually mean a showdown between the US and China.

China, meanwhile, is balancing a new leadership transition with the need to make critical reforms. Since current efforts are aimed at achieving Chinese economic stabilization, key reforms will probably be put on the backburner. Other reforms, however, involving opening up China’s offshore currency market will probably continue. And this could run counter to what many accept as an intensifying currency war.

Competitive devaluations may result in little change in most exchange rates if everyone is in the battle, but they could severely disrupt the Chinese economy if money moves dramatically into new Chinese renminbi-based investments, drives the currency higher and further reduces China’s export competitiveness.

In 2008 and 2009 the G20 was pretty sure a coordinated effort would alleviate global financial and economic stress. That coordinated effort manifested in monetary policy rather than increased government cooperation. If the G20 again promotes cooperation as the answer to currency wars, we can pretty much assume very few countries will be receptive.

 

-JR Crooks

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avatarJack Crooks - Black Swan Currency Currents posted Wednesday, January 23rd, 2013.

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