Monday April 7, 2008 - 15:45:06 GMT
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When it comes to G7 what you see is what you get
As much as I try I find
myself unable to shed my G7 gogglesâ€¦the goggles that make G7 a powerful and
meaningful institution that markets ignore at their own peril. I canâ€™t
remember a major turning point in the dollar that did not involve coordinated
currency intervention. But G7 is nothing like what it once was and apart
from not intervening in FX markets since September of 2000 (bought euros),
there are a number of factors making this institution an irrelevant
To begin with the global
capital market has growth much in the last 8 years and daily turnover in FX
markets, based on BIS surveys, has doubled to around $3trln a day. The
market is so much bigger than G7â€™s ability to influence currency or asset
prices; it makes sense that officials take a hands-off approach to financial
markets (the dollar).
Then there is the emergence
of reserve managers as major players in the FX market who have on balance
mopped up a large share of the supply of dollars through fixed currency regimes
and exports of raw materials (at ever higher prices) and finished goods.
Why do what others are ever more willing to do â€“ funding the US current account deficit and indefinitely putting off
the need for the US economy to adjust to a lower consumption rate or conversely higher
savings rate. Why complain much if exporting finished goods to the US consumption giant is not causing a run on the dollar
(capital losses on all those reinvested assets held by surplus nations)?
Additionally G7 is only as
relevant as the US makes itâ€¦goes with having the reserve currency. The Bush
administration has ideological shackles on international economic policy
coordination â€“ markets are best left to set FX levels not governments.
Moreover, the Bush administration has not had the coziest of relations with its
European counterparts outside of the UK. Even relations with Canada have been the most strained in my lifetime.
Sure Japan remains a loyal friend and ally at the G7
Finally necessity is the
mother of invention and in the last 7 plus years there has not been a currency
or growth crisis necessitating policy coordination. Clearly since last
summer due to the credit crisis this condition has changed and arguably makes
policy coordination (reducing systemic capital market risks) argues for more
not less policy coordination. But the credit crisis so far has been
mainly a US problem from a policy perspective with possibly the
exception of the UK (Northern Rock). Sure the ECB has been active in adding liquidity
to the banking system, but what has it done for growth lately? The most
we can say is the ECB has not hiked rates in light of record high inflation
(what about the free Bernanke growth put the ECB enjoys?).
Still not even the credit
crisis has jolted G7 into a cooperative spirit. European, Canadian and
Japanese concerns over the weak dollar (risk of a disorderly decline) have to
date failed to prompt any new US agreed-to initiative to support the
greenback. Because US exports are benefiting from the decline in the
dollar â€“ Bernanke noted this last week â€“ there is not a snowballâ€™s chance in
hell that the US Treasury will agree to any joint currency intervention
operation or stepped up rhetoric in light of the serious US economic slowdown
now underway. Indeed the only way the Treasury gets to the intervention
table is in the event of a disorderly dollar decline and any chart of the
dollar will show that the decline while multi-year in length and historic in
depth has been anything but disorderly.
The reality of G7 is that it
is a blame game â€“ Europe blames the US for all ill that befalls the global economy and
financial markets and yet thrives on the very imbalances that the US economy supports (Euro Zone exports).
Things have to get much
worse to get G7 to look and act like the G7 of old, no matter my personal
nostalgia for a bygone era.
So no new FX language at G7
Friday in Washington and no elevated risk of currency intervention with
my G7 goggles off.
But if I put on my rose
colored goggles and ask what could G7 do to make a difference in the event
financial markets relapse into disorder and a run on the dollar? Sell
gold â€“ G7 footprint in this market would be significant and in light of the
tight inverse correlation with the dollar and gold, the US currency would shoot up. But at the end of the
day, this bygone solution is only partly complete without a strong signal from
the ECB that rate cuts are on the table and the chance of this happening are
about as likely as the Bush administration being convinced by Euro Zone
officials mainly that the dollar demands increased US support.
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