Is the IMF in Denial About the World’s Currency War?

With the world on the verge of a currency war, the need for macroeconomic policy coordination among the world’s major industrialized economies has never been more urgent. Yet the IMF, the organization best suited to orchestrate such coordination and whose very mandate is to avoid the recurrence of the beggar-my-neighbor type of policies that blighted the 1930 economic landscape, is conspicuously in denial about the risks of any such war. This has to be regretted since it heightens the dangers of a return to a world of competitive currency depreciation and capital controls that could be harmful to global economic growth and prosperity.

As early as September 2010, Guido Mantega, the Brazilian Finance Minister, sounded the alarm about the dangers of a global currency war. He did so as his country was overwhelmed by a flood of capital inflows that pushed Brazil’s currency into the stratosphere with considerable collateral damage to the Brazilian export sector. He also did so as an increased number of emerging market countries resorted to inward capital controls in an effort to stem the upward pressure on their currencies. Provoking Mr. Mantega’s concern was the resort to highly unorthodox monetary policies in countries like the United States and the United Kingdom as well as the continued resort to currency manipulation by China aimed at preventing any undue appreciation of the Chinese renminbi.

Since Mr. Mantega sounded his alarm, in September 2012 the Federal Reserve announced a third round of aggressive quantitative monetary policy easing and committed the Fed to keeping interest rates at unusually low levels at least until 2015. Not only was this round of quantitative easing to involve large-scale monthly purchases of U.S. mortgage-backed-securities but it was also to be continued until there was a material improvement in U.S. labor market conditions. It is perhaps little wonder then that over the past four months the U.S. dollar weakened appreciably despite the relative outperformance of the U.S. economy over the European and Japanese economies.

Read More at Yahoo! Finance . By Desmond Lachman.