G20: Agreement Reached...Or Soon Breached?
The G-20 concluded their session for global economic collaboration this past weekend with a pledge to avoid targeting FX valuation for competitive purposes. A noble, but questionable gesture in the midst of a tepid recovery knowing that limited prospects and choices exist that could definitively lift their economies out of a recessionary continuum and affirm their credibility.
An acknowledgement by the G-20 bureaucrats that fiscal responsibility is needed, states the obvious, as the developed countries pumped out massive programs for deficit financing which produced the liquidity driven rallies in the global equity markets that provided this illusion of a sustainable recovery in the absence of real growth. Coupled with this self destructive addiction is the deliberate and habitual devaluation of one's currency as an effective means to become the low cost provider and resurrect your export advantage.
Forfeiting the case for currency debasement is difficult to abandon when the results are so convincing, immediate and visible. It only took a brief pullback for USD/JPY from a level of 82, last December to 92 this month, to have Toyota overtake GM in auto manufacturing output with an even more ambitious production schedule if it were to reach USD/JPY 95-100 by year end. Not only are the Japanese exporters celebrating their increase in market share, but the Abe administration will help reverse Japan's 20+ year deflationary slide. Export driven advancements also lead to Balance of Trade improvements which typically provide upward adjustments for GDP growth in 3- 4 quarters forward. Real growth emerges as manufacturing begins to percolate along with needs for further employment. Monetary policy, artificially suspended for macroeconomic realignment begins to naturally reassert itself as a tool to balance progressive strength while achieving inflationary equilibrium.
The prevalent opinion that market forces should exclusively guide the process for FX price discovery is not shared equally by all its members or their global counterparts. Methods for economic remediation vary, along with socio-political views ranging from Argentina or Greece; with their dire outlook and long road towards rehabilitation, to that of China with their gradual conversion from an export dependent to a consumption based model. Latin America's commodity assets and foreign direct capital investments influence their decisions and reliance on dominant Asian trade partners and as well as competition from Australia. Germany hopes to continue to lead the discussion in the EU with unyielding cooperation despite the leadership changes in Italy, 24% unemployment in Spain, and the catastrophic ideological shift in France. The Euro cannot move with linear predictability burdened by the weight of pan European underperformance and without periodic intervention that attempts to realign and preserve the EU's hybrid and dysfunctional economic identity.
The announcement and conviction of this broad G-20 consensus to abolish the practice of deliberate currency devaluation supported by distortions in monetary expansion and fiscal irresponsibility is suspect. A platform for weaker currencies reflects the contradiction of economic and political judgment that prevails when a government's desperate search for solutions result in sacrificing a nation's buying power, standard of living and risks inflation in favor of a more attractive exchange rate that temporarily discounts trade and bumps up growth metrics. A devalued currency is like the uninvited guest that crashes the big party, spikes the punch bowl, sleeps with the hostess, and later that night gets arrested for DUI. It was fun for a while, but almost always ends badly.