Global Trends by Martin Khor
Monday 24 September 2012
Warnings of new currency wars
The United States’ recent money-pumping measure has been criticised by Brazil as a protectionist move which will adversely affect developing countries.
The recent announcement by the United States Federal Reserve chief Ben Bernanke that the US would be renewing its pumping of money into the banking system has been acclaimed by some parties as a move to revive its faltering economy.
But the Fed’s measure to revive “quantitative easing” is not being welcomed by all. It has instead caused anxiety in some developing countries.
Their fear is that a large part of the massive amounts of money being unleashed into the financial markets may fail to boost the US economy but will find its way as unwanted capital flows into some developing countries.
Bernanke announced that the Fed would purchase US$40 billion per month of mortgage-linked assets from the market, and do so continuously until the jobs situation improves.
The hope is that cheap and abundant money will encourage entrepreneurs and consumers to spend more and spark a recovery.
However, previous rounds of such quantitative easing did not do much for the US economy. A large part of the extra funds were placed by investors not in new US production but as speculative funds in emerging markets or in the commodity markets, in search of higher returns.
In developing countries that received the funds, adverse effects included an inflation of prices of property and other assets, as well as appreciation of their currencies which made their exports less competitive.
On the other hand, the US dollar depreciated because of the increased supply of US dollars, and the reduced interest rates, making US exports more competitive.
Brazil has been in the forefront of developing countries that are critical of the US money pumping. Last week, the Brazilian finance minister Guido Mantega called the US Fed measure a “protectionist” move that would re-ignite global currency wars.
Mantega told the Financial Times that the third round of quantitative easing would only have a marginal benefit in the US as the already high liquidity in the US is not going into production. Instead, it is really aimed at depressing the dollar and boosting US exports.
Japan has also decided to expand its own quantitative easing programme in response to the US move, and this is evidence of tensions and a currency war, said Mantega.
In previous rounds of liquidity expansion in recent years, Brazil has been one of the developing countries adversely affected by sharp currency appreciation, which reduced its export competitiveness and facilitated import increases.
Recently, Brazil’s currency, the real, has weakened from the high of 1.52 real to the dollar to the present 2 real, which has improved its competitiveness.
But the new liquidity expansion in the US may again cause a flood of funds to enter Brazil, and reverse the currency trend. In such a situation, Brazil may be forced to take measures to stop the real from appreciating, said the Minister. Previously, the country had taken capital controls to discourage inflows of foreign funds.
What has irritated Brazil even more is an accusation by the United States Trade Representative Ron Kirk that Brazil has become protectionist in raising some tariffs, even though the Brazilian measures were within its rights in the WTO framework.
Brazil’s Foreign Minister Antonio Patriota last week wrote to Kirk pointing out the unfairness of a protectionist US accusing Brazil of protectionism.
“The world has witnessed massive monetary expansion and the bailout of banks and industrial companies on an unprecedented scale, implemented by the US and other developed countries,” said Patriota. “As a result, Brazil has had to cope with an artificial appreciation of its currency and with a flood of imported goods at artificially low prices.”
He pointed out that the US was a major beneficiary, as it almost doubled its exports to Brazil from US$18.7 bil to US$34 bil from 2007 to 2011.
“While you refer to WTO-consistent measures adopted by Brazil, we, on our side, worry about the prospect of continued illegal subsidization of farm products by the US, which impact Brazil and other developing countries, including some of the poorest countries in Africa.
“The US has managed in a short period to remarkably increase its exports to Brazil and continues to reap the benefits of our expanding market, But it would be fairer if those increases took place in an environment not distorted by exchange rate misalignments and blatant Government support”.
As the quantitative easing from the US and Japan is only going to take effect in future, it remains to be seen whether history will repeat itself -- it will have minimal effect on US and Japanese economic recovery but will cause problems for developing countries. Or whether it will be different this time.