- The Washington Times - Tuesday, November 9, 2010

President Obama’s goal of galvanizing efforts by the world’s leading economic powers this week to curb ballooning trade imbalances around the world appears in jeopardy as international outrage mounts over the Federal Reserve’s easy-money policies.

With the Group of 20 summit in Seoul, South Korea, kicking off Wednesday night, countries from China and Germany to Russia and Brazil have voiced strong criticism of the Fed’s move to essentially print money and buy up much of the debt of the U.S. Treasury as a way to boost the U.S. economy.

Brazil, for one, has vowed to raise concerns about the issue at the G-20 meeting, suggesting that fresh controversy over the Fed’s move already is eclipsing the planned debate over the administration’s trade agenda.

Mr. Obama wants to focus international pressure in particular to coax China and other Asian countries to stop fixing their currencies to the U.S. dollar to gain an advantage in trade, an advantage that critics say has contributed to chronic trade surpluses in the region and the bloated U.S. trade deficit.

Since the Fed’s loose-money policies have caused a steep drop in the U.S. dollar in recent weeks, many countries instead are questioning whether Washington itself isn’t trying to devalue its currency to gain an advantage in trade. Mr. Obama’s stated goal is to double U.S. exports in the next five years.

German Finance Minister Wolfgang Schauble on Monday accused the United States of a double standard, arguing that it was “inconsistent” to accuse the Chinese of manipulating its currency when the Fed is pumping $900 billion into financial markets to steer the dollar lower with the help of “the printing press.”

Apparently in anticipation of little progress at the Seoul meeting on the trade agenda, the U.S. already is signaling that it may tone down its demands for action by China, Germany and other countries with chronic surpluses, said Aroop Chatterjee, analyst at Barclays Capital.

“The stepped-up rhetoric amidst an apparent backdown by the U.S. implies that further agreement between the different parties — the deficit and surplus countries — is not likely,” he said. But he expects the group will at least ratify a communique drafted last month by finance ministers calling on countries to work to bring down their trade imbalances.

It would be the second time this year that international controversies blew up Mr. Obama’s hopes of focusing world attention on the trade-imbalance problem. The issue also got derailed at a meeting of the G-20 last spring after a sharp dispute broke out between the U.S. and Europe over the urgency of curbing their gigantic budget deficits.

The Fed, for its part, denies that the purpose of its Treasury bond-buying campaign is to drive down the dollar, although it concedes that has been a helpful side effect because it stimulates demand for U.S. exports. The Fed’s stated goal is to generate faster growth in the domestic economy.

Also in response to critics of the central bank’s tactic of purchasing much of Treasury’s long-term debt issuance, Fed Chairman Ben S. Bernanke has pointed out that the central bank is only doing in an expanded way what is does every week to maintain the U.S. money supply by buying and selling short-term Treasuries through the Fed’s New York market window.

That hasn’t stopped a hail of criticism from nearly every quarter of the globe since the Fed announced its plan on Nov. 3. Brazil’s finance minister last week warned of “grave damage” to the global economy and markets.

On Monday, Chinese Vice Finance Minister Zhu Guangyao said the U.S. isn’t living up to its responsibility to defend the U.S. dollar, the world’s principal reserve currency — alluding to a mandate that was included in the G-20 communique drafted by finance ministers last month.

Beijing also suggested that the Fed, as the world’s central bank, is not only responsible to U.S. citizens, but owes an accounting to the rest of the world. Its recent move doesn’t “take into account the effect of this excessive liquidity on emerging-market economies,” the Chinese minister said.

Russia is calling on the Fed to consult with the G-20 before taking further action, while Luxembourg Prime Minister Jean-Claude Juncker said the Fed did not make “a good decision” by choosing to “fight debt with more debt.”

President Obama in an unusual move on Monday defended the actions of the independent central bank as necessary to spur faster growth in the U.S. At a joint press conference with the Indian prime minister in New Delhi, the president also sought to refocus the debate on the problem with trade imbalances.

“We can’t continue to sustain a situation in which some countries are maintaining massive surpluses, others massive deficits, and there never is the kind of adjustments with respect to currency that would lead to a more balanced growth pattern,” he said.

Peter Morici, University of Maryland business professor and an international trade expert, said Mr. Obama should fight fire with fire. He said China, Germany and Japan — the countries with the biggest trade surpluses — are “stonewalling” and trying to deflect attention from their practices.

“Seldom has the G-20 been treated to such hypocrisy,” he said, noting that China in particular has followed even looser money policies than the Fed for years.

“To keep its currency about 40 percent below its market value against the dollar, it prints yuan to purchase dollars, and then purchases U.S. Treasuries,” he said, adding that China’s money-printing program is on a “grander scale” than the Fed’s.

China’s currency distortion is a principal cause of its gigantic $250 billion trade imbalance with the U.S., which in turn is the principal reason the U.S. economy is stagnating as U.S. consumers purchase more goods from abroad than at home, Mr. Morici said.

Japan and Germany also rely on undervalued currencies to maintain their grip on U.S. markets, he said, even as Germany lectures the U.S. about “the virtues of Teutonic thrift.”

To offset the substantial trade advantage these countries pursue, the U.S. should impose stiff tariffs on their imports “until the Gang of Three agrees to acceptable exchange-rate reforms,” he said.

With stinging rhetoric coming from all sides, some analysts are worried about the potential for trade and currency wars breaking out like the ones during the 1930s that prolonged and worsened the Great Depression.

“On the face of it, every country seems to be aiming at a depreciation of its currency — or at least avoiding an appreciation,” just as occurred during the 1930s, said Jean Pisani-Ferry, analyst at the Brookings Institution. “Only the euro seems to be bucking this trend.”

He noted the currency wars during the 1930s started two years after the October 1929 financial crash, just as today’s currency spats are occurring two years after the September 2008 financial collapse.

“It became evident that everybody cannot have a weak currency at the same time, and a major lesson from the 1930s is that one of the roles of the multilateral system is to prevent futile beggar-thy-neighbor depreciation,” he said.

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