- China Steps Up, but Its Currency Still Has Dues to Pay
The New York Times DEC. 5, 2015
An ad depicts the renminbi with the United States dollar and other major world currencies. The renminbi will join the euro, yen, dollar and pound in the I.M.F.’s basket of reserve currencies in October. CreditTyrone Siu/Reuters
The dollar lost a bit of its exalted status last week and the Chinese renminbi gained some luster. That was the straightforward meaning of an announcement in Washington by the International Monetary Fund, which decided to admit the renminbi to an exclusive group of elite currencies.
But global markets told quite a different story: The renminbi remained no more than a promising but relatively inconsequential currency, while the euro weakened and the dollar remained at the center of world events, with effects that rippled through the world economy.
To make sense of these apparently conflicting pictures, first examine the I.M.F. decision on the renminbi. It was long awaited and, in some ways, portentous, signaling China’s growing political clout, if not the ascendance of its currency.
The international organization decided that for the first time, the Chinese currency would join the dollar, the euro, the Japanese yen and the British pound in a prestigious, if obscure, club: The big four currencies together form a global reserve asset known as the I.M.F.’s Special Drawing Rights (S.D.R.) basket. Next October, the renminbi will become the fifth member.
Making Room for Renminbi
The changing makeup of the International Monetary Fund’s accounting system reflects the rising economic power of China, while Europe’s influence wanes.
S.D.R.s aren’t a currency, but they can be used as a claim on currencies in the basket, indirectly bolstering the role of the renminbi as a potential reserve currency. While this doesn’t have much day-to-day significance right now, it certifies that China’s currency, which could barely be traded on world markets only a few decades ago, has already come a long way. In order to qualify for inclusion, an S.D.R. member needs to be the currency of a major exporter, and the renminbi certainly is that.
The other main qualification is ticklish: A currency needs to be “freely usable.” Using a strictly technical definition, the I.M.F. declared that the renminbi meets that test, even though its price doesn’t move freely in currency markets and it isn’t traded or held nearly as much as the other major currencies.
The I.M.F. acknowledged that “challenges” remained for the renminbi and stressed “the importance of continuing and deepening” the financial and economic reforms that have taken place in China. These reservations are substantial.
Nonetheless, Xinhua, the official Chinese news agency, said quite correctly that the I.M.F. decision amounted to “landmark recognition” of China’s growing economic power. In order to make room for the renminbi in its S.D.R. basket, the I.M.F. shrank the other four currencies, especially the euro. The dollar lost a little of its stature.
But if the renminbi’s rise in status signaled the incipient decline of the dollar, you wouldn’t have known it from the action in the foreign currency markets, or from any other major markets last week. The dollar did fall against the euro on Thursday, after the European Central Bank issued policy guidance that surprised some traders. But if anything, the almighty dollar, as Washington Irving once called the greenback, retained every bit of its global importance.
It was striking that on the very day of the I.M.F.’s announcement about the renminbi, the dollar actually rose to an 11-year high against major currencies, according to Bloomberg trade-weighted data. And on Wednesday, the value of the dollar reached new heights.
It was bolstered by comments from Janet L. Yellen, the Federal Reserve chairwoman, suggesting that the Fed would soon raise short-term interest rates after holding them close to zero for nearly seven years. Ms. Yellen’s testimony before Congress on Thursday added to that general conviction in the markets, though the dollar briefly gave up ground against the euro after the European Central Bank in Frankfurt loosened monetary policy less than had been expected.
Still, the market consensus remains that diverging policies in Europe and the United States will solidify a trend that has been underway for many months: The euro will weaken further and the dollar will grow ever stronger.
What’s more, the rising dollar over the last year has already had profound effects. It has helped account for the drop in commodity values, which are commonly priced in dollars. The soaring greenback has also pummeled producers of coffee, cotton, copper, zinc, oil and gold, and it has punished many commodity-producing nations, like Brazil, Russia, Saudi Arabia and Canada.
At the same time, the dollar has helped put a lid on inflation in the United States, the Federal Reserve said last week in the periodic surveyof American economic conditions known as the beige book. “The strong dollar put downward pressure on prices,” the Fed said. It also concluded that the dollar had hurt the competitiveness of American exporters and contributed to weakening global economic demand.
And in earnings calls with financial analysts, a range of American companies reported that the dollar had created significant headwinds for their businesses, and was likely to do so in 2016. As Goldman Sachs reported in its most recent beige book — a survey of corporate America that it periodically performs: “A strong U.S. dollar continued to weigh on earnings, particularly for companies with significant international exposure.”
Those effects are widely expected to strengthen, not weaken, in the months ahead. The dollar remains the main currency in which the world does business. It accounted for more than 43 percent of foreign currency turnover in 2013, the most recent I.M.F. figure, compared with less than 17 percent for the euro, the second-most-widely-used currency. At 1.1 percent, the renminbi barely showed up on the radar.
Still, the renminbi is being traded frequently in Asia, the I.M.F. found, if not much in Europe or North America. And because China is already among the world’s biggest exporters — it is the biggest, by some measures — it has leverage to shift commerce toward the renminbi rather than the dollar.
China has already demonstrated that a small shift in the value of the renminbi can have major effects on global markets. In August, it announced that it would allow the renminbi to float in a broader range — a shift that helped China receive the benediction of the I.M.F. last week — but when the currency briefly lurched downward, world currency, stock and commodities markets fell sharply.
In Beijing last week, Yi Gang, deputy governor of the People’s Bank of China, said the bank intended to “keep the renminbi’s exchange rate stable at a reasonable level,” yet would also gradually allow the currency to move more freely. Those goals may prove to be difficult to achieve simultaneously. Having disrupted the markets only recently, China could do so again.
But China’s rising status at the I.M.F. could have a calming effect. It will lead to a small rebalancing of global reserves at central banks, which are likely to begin to modestly increase their renminbi holdings. Eventually, the renminbi could become a haven in times of trouble, a place where investors seek security, not a currency from which people flee, as has recently been the case.
In order to achieve that transformation, the renminbi will have to become much more freely and dependably usable than it already is. It is becoming more important and will undoubtedly grow in stature. But the dollar remains at the fulcrum of world trade and global economics.
- A New Century for the Middle East
The Project Syndicate DEC 19, 2015
NEW YORK – The United States, the European Union, and Western-led institutions such as the World Bank repeatedly ask why the Middle East can’t govern itself. The question is asked honestly but without much self-awareness. After all, the single most important impediment to good governance in the region has been its lack of self-governance: The region’s political institutions have been crippled as a result of repeated US and European intervention dating back to World War I, and in some places even earlier.
One century is enough. The year 2016 should mark the start of a new century of homegrown Middle Eastern politics focused urgently on the challenges of sustainable development.
The Middle East’s fate during the last 100 years was cast in November 1914, when the Ottoman Empire chose the losing side in World War I. The result was the empire’s dismantling, with the victorious powers, Britain and France, grabbing hegemonic control over its remnants. Britain, already in control of Egypt since 1882, took effective control of governments in today’s Iraq, Jordan, Israel and Palestine, and Saudi Arabia, while France, already in control of much of North Africa, took control of Lebanon and Syria.
Formal League of Nations mandates and other instruments of hegemony were exercised to ensure British and French power over oil, ports, shipping lanes, and local leaders’ foreign policies. In what would become Saudi Arabia, Britain backed the Wahhabi fundamentalism of Ibn Saud over the Arab nationalism of the Hashemite Hejaz.
After World War II, the US picked up the interventionist mantle, following a CIA-backed military coup in Syria in 1949 with another CIA operation to topple Iran’s Mohammad Mossadegh in 1953 (to keep the West in control of the country’s oil). The same behavior has continued up to the present day: the overthrow of Libya’s Muammar el-Qaddafi in 2011, the toppling of Egypt’s Mohamed Morsi in 2013, and the ongoing war against Syria’s Bashar al-Assad. For almost seven decades, the US and its allies have repeatedly intervened (or supported internally-led coups) to oust governments that were not sufficiently under their thumb.
The West also armed the entire region through hundreds of billions of dollars in weapons sales. The US established military bases throughout the region, and repeated failed operations by the CIA have left massive supplies of armaments in the hands of violent foes of the US and Europe.
So, when Western leaders ask Arabs and others in the region why they can’t govern themselves, they should be prepared for the answer: “For a full century, your interventions have undermined democratic institutions (by rejecting the results of the ballot box in Algeria, Palestine, Egypt, and elsewhere); stoked repeated and now chronic wars; armed the most violent jihadists for your cynical bidding; and created a killing field that today stretches from Bamako to Kabul.”
What, then, should be done to bring about a new Middle East? I would propose five principles.
First, and most important, the US should end covert CIA operations aimed at toppling or destabilizing governments anywhere in the world. The CIA was created in 1947 with two mandates, one valid (intelligence gathering) and the other disastrous (covert operations to overthrow regimes deemed “hostile” to US interests). The US president can and should, by executive order, terminate CIA covert operations – and thereby end the legacy of blowback and mayhem that they have sustained, most notably in the Middle East.
Second, the US should pursue its sometimes-valid foreign-policy objectives in the region through the United Nations Security Council. The current approach of building US-led “coalitions of the willing” has not only failed; it has also meant that even valid US objectives such as stopping the Islamic State are blocked by geopolitical rivalries.
The US would gain much by putting its foreign-policy initiatives to the test of Security Council votes. When the Security Council rejected war in Iraq in 2003, the US would have been wise to abstain from invading. When Russia, a veto-wielding permanent member of the Council, opposed the US-backed overthrow of Syrian President Bashar al-Assad, the US would have been wise to abstain from covert operations to topple him. And now, the entire Security Council would coalesce around a global (but not a US) plan to fight the Islamic State.
Third, the US and Europe should accept the reality that democracy in the Middle East will produce many Islamist victories at the ballot box. Many of the elected Islamist regimes will fail, as many poorly performing governments do. They will be overturned at the next ballot, or in the streets, or even by local generals. But the repeated efforts of Britain, France, and the US to keep all Islamist governments out of power only block political maturation in the region, without actually succeeding or providing long-term benefits.
Fourth, homegrown leaders from the Sahel through North Africa and the Middle East to Central Asia should recognize that the most important challenge facing the Islamic world today is the quality of education. The region lags far behind its middle-income counterparts in science, math, technology innovation, entrepreneurship, small business development, and (therefore) job creation. Without high-quality education, there is little prospect for economic prosperity and political stability anywhere.
Finally, the region should address its exceptional vulnerability to environmental degradation and its overdependence on hydrocarbons, especially in view of the global shift to low-carbon energy. The Muslim-majority region from West Africa to Central Asia is the world’s largest populous dry region, a 5,000-mile (8,000 kilometers) swath of water stress, desertification, rising temperatures, and food insecurity.
These are the true challenges facing the Middle East. The Sunni-Shia divide, Assad’s political future, and doctrinal disputes are of decidedly lesser long-term importance to the region than the unmet need for quality education, job skills, advanced technologies, and sustainable development. The many brave and progressive thinkers in the Islamic world should help to awaken their societies to this reality, and people of goodwill around the world should help them to do it through peaceful cooperation and the end of imperial-style wars and manipulation.
- The Fed awakens
The Federal Reserve has at last raised interest rates
But the economy’s reaction to the Fed’s rate rise is hard to predict
The Economist Dec 16th 2015
AFTER a build-up worthy of a blockbuster, the Federal Reserve has at last raised interest rates, putting an end to six years at close-to-zero. From December 17th the target band for rates will be 0.25% to 0.5%, a quarter of a percentage point higher than today (see chart 1). Now that rates have at last lifted off, what will they mean for the American economy?
In theory, higher rates have three main effects. First, they slow spending as credit becomes more expensive and the return to saving increases. Second, they strengthen the dollar by attracting foreign capital. Third, they reduce asset prices by increasing the discount rate applied to future profits. The reality, however, is not always in line with the theory. On average, in the years following the start of the past five rate-rising cycles, the dollar held steady and share prices continued to rise (see charts 2, 3 and 4).
The impact of changes in interest rates is not usually felt on announcement, as the Fed tends to signal its intentions in advance and the markets to respond accordingly. That explains the stickiness of the dollar and shares. The response of the real economy also comes with a delay. Most reckon it takes time for monetary policy to shift spending habits, and one rate rise is more an easing of the accelerator than a U-turn. Unemployment continued to fall in each of the past five tightening episodes (see chart 5). That will probably happen again: most economists forecast unemployment of around 4.7% at the end of 2016, compared with 5% today.
The most uncertain variable is inflation. This fell rapidly following rate rises in 1983 and 1988 as the Fed established its hawkish credentials. Yet in 2016, the most likely direction for inflation is up (the rate rise is aimed at restraining its ascent). Whether wages follow suit depends on productivity growth.
