“In the long run, we are all dead”, wrote John Maynard Keynes. Well, welcome to the long run, says George Magnus, senior economic adviser at UBS.
But there is a further and more significant perspective slowly emerging from the shadows, says Magnus. In short, it is “whether the clock has now started to tick down to a significant revaluation of the Chinese currency”.
He argues that:
1) America seems likely to lower interest rates for as long as the cycle decays - and that might take quite a long time. China and other emerging market economies actually need to “decouple” in the sense that they should be stepping up the pace of monetary restraint. But this will be hard to accomplish without complicating domestic monetary management and aggravating asset overvaluation, unless governments opt for faster exchange-rate appreciation.
3) There’s a solid pattern of global monetary instability that has common features and always ends the same way. The script reads: rising power colludes to prevent proper exchange rate adjustment; internal price and asset dislocations sooner or later lead to financial excess and stress; and finally, exchange rate revaluation or faster appreciation occurs.
4) In the late 1960s and early 1970s, Germany and Japan were rising economic powers that defended the pressured Bretton Woods system at first. Though President Nixon probably pulled the trigger on Bretton Woods, a key catalyst was America’s dwindling gold reserves as European powers sought to swap their surging USD monetary reserves for real assets.
5) Here we are again. China is a rising, protectionist economic power that is colluding, in effect, with the US to sustain an undervalued currency. Other emerging market economies do so too. The consequences of the massive expansion in forex reserves can be restrained up to a point but not altogether or forever. Sovereign wealth funds want to trade dollar monetary assets for real assets — and in the west, we don’t like it. While we can talk about transparency and accountability, is this not just protectionism by another name? Existing monetary arrangements look likely to be tested more severely now in the wake of the credit crunch, the declining dollar and the polarisation of economic and political interests....MORE