G20 Leaders Made No Change to Currency Policy

September 6, 2016

Leaders from the Group of 20 completed their meetings in Hangzhou, China and released a statement of roughly 7,250 words. Four sentences summarize their common view on exchange rates:

We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. Our relevant authorities will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency.

The tradition of annual summits of the political leaders of the major developed and emerging economies that make up the G20 continues a tradition begun in 1975 by the leaders of a considerably smaller group of six nations, each with a developed economy. The first G6 summit was held in Rambouillet, France on November 15-17 of that year just over two years after the emergence of a new international monetary system featuring flexible market-determined exchange rates between the United States and other major industrialized economies. As a backdrop to that first summit, currency management was a larger agenda item than now, but language in the Rambouillet statement on foreign exchange outlined an activist monetary policy role to ensure that currency values reflect proper economic fundamentals:

With regard to monetary problems, we affirm our intention to work for greater stability. This involves efforts to restore greater stability in underlying economic and financial conditions in the world economy. At the same time, our monetary authorities will act to counter disorderly market conditions, or erratic fluctuations, in exchange rates. We welcome the rapprochement, reached at the request of many other countries, between the views of the U.S. and France on the need for stability that the reform of the international monetary system must promote.

Currency market intervention by central banks, that is the direct purchase and sale of one’s own money against the money of a different country, was common in 1975, but is now employed very seldomly. The presumption then was that without such intervention, there was natural tendency for market prices to become unrepresentative of national economic fundamentals. The presumption now is that currency intervention all too often perpetuates market disequilibrium intentional to gain short-term competitiveness or unintentionally because market forces embody fuller knowledge of an appropriate exchange rate than do well-meaning technocrats.

In 2016, the matter of international trade and the virtue of multilateral trade deals has attracted a revisionist suspicious aura.  The Rambouillet summit, by contrast, was held at a time when international trade was considered a key element of the post-WW2 strong economic growth.  The Rambouillet statement that this to say about trade:

We believe that the multilateral trade negotiations should be accelerated. In accordance with the principles agreed to in the Tokyo Declaration, they should aim at achieving substantial tariff cuts, even eliminating tariffs in some areas, at significantly expanding agricultural trade and at reducing non-tariff measures. They should seek to achieve the maximum possible level of trade liberalization therefrom. We propose as our goal completion of the negotiations in 1977.

The changing times between 1975 and now can also be seen the shifting views regarding growth and inflation. To this day, the Carter Presidency is widely perceived as a failed one. U.S. real economic growth during the four-year Carter Presidency averaged 3.2% per year, well above the 1.3% annual average pace over the ten years from 2Q06 through 2Q16. CPI inflation was considered excessive at 5.2% when Carter took office and more than doubled to 11.8% at the time that he left. CPI inflation over the ten years between August 2006 and August 2016 fell, by contrast, from 4.1% to 0.8%. Unemployment was at the same rate when Carter’s presidency began, 7.5%, and ended. Likewise, the jobless rate of 4.9% last month was similar to the 4.7% rate in August 2006, but that fact masks a sharp upswing in between to a peak of 10.0% and an overall parabolic trajectory. In 1975, it was becoming gospel that stronger rates of real growth would be promoted by stable and low inflation. The experience of the past decade doesn’t conform to that theory.

Copyright 2016, Larry Greenberg.  All rights reserved. No secondary distribution without express permission.

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