Yesterday, PIMCO’s CEO and co-CIO, Mohamed El-Erian, wrote an article on CNBC about the confusion surrounding comments from the recent meeting of the G-7 (the G-7 is a group of finance ministers from 7 of the largest industrialized nations, economically: the US, UK, France, Germany, Italy, Canada, and Japan). To sum things up, the G-7 say they don’t want a currency war but rather, are focusing on “domestic objectives through domestic instruments.” I read this as “We say we’ll play nicely, but we’re really just going to secretly do what’s best for our own country…which means continuing the same beggar-thy-neighbor tactics. Hopefully the rest of the world doesn’t notice.”
This has larger implications than simply affecting the exchange rate for overseas travelers. How this plays out could very well determine the path of the global economy. If they’re able to actually act in a stable, coordinated effort, the global economy will continue to expand. If they can’t and concerns of currency wars continue to grow, things will break down in a significant manner. As El-Erian writes:
The longer this regime of unusual central bank activism continues, the greater the bar bell in macro expected outcomes. The Fed-led global shift to expansionary monetary policy could help transition major economies from “supported growth” to “genuine growth.” But it could also stress the global system to such an extent that it could cause significant fragmentation and breakage.
The US Federal Reserve is trying to get other Central Banks around the world to join in a coordinated effort of easier monetary policies. Their view is that if everyone can act together, everyone will benefit. The issue that I see with this is that not everyone may want to do what the Fed is doing. Every country has issues of its own that need to be tackled. Some countries have high unemployment while others are fighting inflation. Some are export focused while others are import/consumption driven. Specifically, the biggest problem lies between the developed and emerging nations. Most developed nations face numerous issues, including poor demographics, high unemployment, large amounts of existing debt and growing deficits, while most emerging nations are in much better shape on the opposite end of the spectrum.
It’s great the G-7 issues a statement saying that they want to play nicely, but actions speak louder than words, and I have yet to see any actions to back this statement. France and Italy, at double-digit unemployment, really don’t care about helping Japan’s exports; they care about their own. As long as these games continue, more and more of the stronger emerging nations will have to step in to intervene, ultimately putting the developed nations in an even worse position.
Nick