Opinion: Deliberate US$ devaluation causing mounting global imbalances

By Neville Bennett In the last week two iconic manufacturers, within 5 miles of my home, have closed. These were NZ's only tire manufacturer and famous outdoor goods provider. They were victims of a high Kiwi dollar. They are not isolated examples but part of a virulent hollowing out process. The Kiwi has flourished despite official attempts to talk it down as well as poor fundamentals. New Zealand's woes are shared by many other countries. I started to write this column on Britain's current difficulties but when I researched the nature of its unemployed, the penny dropped; manufacturing was its largest casualty too. While most countries cause their own problems, a large part of the global malaise is caused by the US's selfish devaluation, which coupled with the pegged Yuan is causing mounting imbalances. Global trade is withering too and protectionism rising. Britain's Woes

Italy has overtaken the UK, making Britain the world's seventh largest economy (the Poms are suffering the cost of contraction for six consecutive quarters). There were declines in manufacturing and services, especially in distribution, catering and hotels. The economy has contracted 5.9% from its pre-recession peak. Government debt is projected to rise to ₤1.4 trillion, approximately 80% of GDP. Many British problems are self-inflicted, but the unemployed show that global context is adverse too. Contrary to received wisdom, financial services and white collar jobs have held up better than blue collar. Manufacturing has lost a massive 8.5% of jobs, financial services only 3.8%. Rather unexpected initially, the number of men in work has fallen by 3% because blue collar jobs are down. Women, who are disproportionately in education, health and government suffered only 0.8% more unemployment. The Midlands and Northern industrial areas are the worst hit areas. The UK is unlikely to grow even by 1% in 2010. I believe this implies further difficulty for the UK and NZ in creating jobs, while halting the haemorrhage in manufacturing jobs and battling improving terms of trade. Aviation Aviation is an excellent indicator of the real economy. IATA reported that August was slightly better than July, but traffic was down 1.1% y-o-y and freight 9.6% down on a year ago. International freight is still 16% below April 2008 when business slumped. Average fares had fallen about 20%. IATA's CEO said demand was improving "but profitability remains ever distant". The Asia-Pacific region was improving, boosted by massive government and central bank stimulus packages and fewer problems with consumer debt or bank balance sheets. Asia-Pacific has 44% of global freight, and is still down 9% on a year ago. Global Trade Down Global trade slipped in August revealing that the recovery is fragile and not necessarily gaining momentum. The Netherland's announced that global trade volumes fell by 2% in the month since July, and 13% compared to the previous year. The recession is hurting exports of countries like Japan, Germany and the UK, and has sparked some protectionism. The fall has occurred despite world leaders making more trade finance available. The IMF expects a fall in global trade of 11.9% in 2009, and modest 2.5% growth in 2010. Global imbalances are blamed for hindering growth. It is now commonplace for world leaders to call for the US to reduce is deficits and for Asian leaders to revise their currency and reduce their emphasis on exports: they are encouraged to develop their welfare and pensions systems rather than pile up surpluses. This situation is not easing: the US is adding to its deficit and China is letting its currency depreciate. Competitive devaluations: Yuan The Yuan is essentially pegged to the depreciating dollar. China's unwillingness to revalue its currency is causing harm around the world (including NZ and UK) because its increases competition to their exports and domestic producers. Its Asian neighbours like South Korea, Thailand and Malaysia are suffering. China's neighbours are at a critical juncture. To remain competitive against the Dollar and Yuan, their central banks have built massive reserves in US treasuries, but their reserves have been devalued to pre-crisis levels by the dollar's junking. At the same time the US, IMF and World Bank have been hypocritically urging them to allow their currencies to revalue, and to reduce their export focus by spending more domestically. It is unrealistic to expect these countries, in fragile recovery mode, to make sacrifices when no one else is. Since its March high, the US$ (and the Yuan) have fallen 24% against the Won, 10.4% against the Singapore dollar, 7.7% against the Baht, and 9.3% against the Ringgit. The Koreans, Thais and Taiwanese collective reserves are at an all-time high of US$ 720 bn. (China has US$2.27 trillion). Currency is part of imbalances There is a fallacious doctrine of immaculate transfer: that exchange rates have nothing to do with international imbalances. With a little help from Paul Krugman's blog, I will show that exchange rates are causing universal problems. Krugman's unacknowledged motive is to justify a devaluation, which, as the high priest of stimulus spending, he prefers to any inconvenience to the US public, especially its workforce. He says that increasing US exports would require one of three things: "(1) deflation in the United States (2) inflation in the rest of the world (3) a depreciation of the dollar against other currencies. Leave (2) aside, on the grounds that central banks will fight it. Then the choice is between (1) and (3)." He dismisses deflation as "hard (ask Spain), because prices are sticky in nominal terms". So "to narrow international imbalances, we need a lower relative price of US output"¦.by far the easiest way to get there is dollar depreciation". He acknowledges that otherwise "US relative wages, has {have} to fall". Krugman is part of the US policy elite which is playing its usual unilateralist game of putting its national interest ahead of the global good. The depreciating dollar is part of the international problem of imbalances. I began by suggesting the UK is the canary in the mine. Despite stimulus, its growth is faltering. My up-to-date data from Holland and IATA shows a precarious recovery, and one in which the devaluation of the US dollar and the Yuan is wreaking destruction, especially to manufacturers. I also believe that devaluation is a deliberate ploy. Ben Bernanke, Great Depression scholar, knows devaluation had good results for the US in the 1930's. ____________ * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared. neville@bennetteconomics.com www.bennetteconomics.com