G20 Currency Battle Becomes 'Poker Game'
BOSTON (TheStreet) -- Leaders of the world's 20 biggest economies convene in Seoul for a gathering aimed at finding a way to coordinate and ensure a global economic recovery.
But as the key players at the meeting quibble over accusations of currency manipulation, one investment manager says the proceedings resemble a game of poker more than a meeting of powerful nations.
The Group of 20, or G20, summit
is intended to help some of the largest nations develop a framework for balanced global growth while strengthening a regulatory system to prevent another widespread financial crisis.
But as
the G20 meeting gets under way
, the focus once again turns to fears of a currency war in which countries would attempt to devalue their money to help domestic exporters.
This comes after China and Germany took aim at the quantitative-easing measures recently announced by the U.S.
Federal Reserve
. The central bank announced earlier this month that it would buy an additional $600 billion in Treasuries in hopes of propping up the U.S. economy and boosting employment.
However, exporter countries such as China and Germany argue that the so-called QE2 will devalue the dollar, thereby helping U.S. exporters. The criticism is not unlike how the U.S. has accused China of keeping the value of its currency low for the benefit of its exporters.
Jason Pride, director of investment strategy at Glenmede Investment and Wealth Management, offers his view of the political struggle between nations over currency concerns.
What is your take on the G20 summit and the currency issues that are arising from it?
Pride
: This is getting overblown. When you really look at what the U.S. is doing, there are offsets. It's not all about currencies and what the Fed is doing with printing money. That's only part of the story. When you look at the big picture, we are entering an environment of fiscal policy that is marginally restrictive
and offset by monetary policy that is stimulative. That combination is happening on a near-term basis and that's how you actually address a deficit and debt problem that is outsized.
Chinese officials don't want to admit they should be supporting countries like the U.S. during a period of economic difficulty. Politically, who in China wants to be doing that? In reality, as far as the way the international coordination of monetary and fiscal policies go, it's probably the right outcome. China's primary export market is the U.S. Ultimately, their economy is tied to the U.S. and they want it to survive in reasonably good shape. There is an incentive for them to have some give-and-take in this situation.
What do you make of countries like China and Germany accusing the U.S. of manipulating the currency to give exporters a benefit?
Pride
: They're overstretching the case a little. The primary intention of the Federal Reserve at this time is to make sure that the monetary policy remains stimulative to offset what needs to be done on the fiscal side of the equation to fix the debt and deficit picture and the general economy. If you look at the policy in a U.S. bubble, they're taking the right approach. There are side effects to that, one of which is that the U.S. dollar gets weaker as more are supplied in volume to the market. But that's more of a side effect than a direct intention.
It happens to be a good side effect on a near-term basis from the U.S. perspective. They'll admit that behind closed doors, behind the scenes, but they'd never admit that publicly. The long-term belief is that if they do things right with monetary policy and combine it with the right approach on fiscal policy, better fiscal policy in the U.S. will actually end up creating a longer-term benefit for the U.S. dollar.
Is there a bit of irony in China accusing U.S. of manipulating its currency?
Pride
: This is like a game of poker. Everybody tries to overstate or understate their hand. They never tell you exactly what the reality is. When you think about it, it's kind of the same thing. Cross-currency politics and international trade is a bit of game theory. Everyone wants to act like they're supporting their own economy, when in reality, they're making contrary statements to what they really know is the long-term interest. China definitely wanted to be an economy that was stimulating themselves by being pegged to the dollar. They will never really admit that. They will argue that they wanted currency stability and that their economy was working just fine. But the reality is, it was always a little more stimulative than it should have been.
The U.S. is acting now in a similar manner. It's far more justified to actually be doing what the U.S. is doing than what China was doing. The reason I say that is because economic policy dictates that you use fiscal and monetary stimulus efforts when your economy is in trouble. Well, the U.S. economy is in trouble, and we're using monetary stimulus. In China's situation, has their economy been in trouble or has it been on a really good run?
Having said that, I don't think what China says or does is all that bad when you really dig into how they run their economic policy. People use the currency issue as a lightning rod. They use a lot of other things to constrain or expand their economy. They have a lot of other levers. You find them trying to let their currency stay low while they really limit lending and they tighten down on interest rates and reserves at banks. They really manhandle their economy in a more dramatic fashion as an offset to their currency policy.
From an investment standpoint, what are the themes now based off the G20 summit?
Pride
: We have become more optimistic about the entire equity landscape due to a revision or change in will to address the fiscal issues at a majority of governments. The European austerity programs are evidence of that. Consumers saving more in the U.S. is some evidence of that. Now, what's occurring in the U.S. with budget deficit negotiations and the mid-term elections, that's coming at the same time as some signals that the economy is not as bad as it was this summer. We're gradually becoming more optimistic.
As far as the quantitative-easing plan does for us mentally, it helps that overall picture of being more optimistic on the equity side of the equation. It helps the area of emerging markets, though, more than any other. It helps it from the perspective that stimulus gets exported to those nations to some degree, whether it is the money going in that direction or it's the demand in the U.S. helping the exports from those areas. Secondly, it should end up creating longer-term incentives for emerging-market currencies to rise specifically against the dollar. Perhaps the dollar is coming down, but it might be because those other currencies are rising or that China decides to offset some of the dollar's decline with a little more appreciation of their currency against the dollar.
You make reference to budget-deficit negotiations in the U.S. Can you discuss the potential impact of what that could mean for the country?
Pride
: The two co-chairs of the budget-deficit panel released their recommendations for budget-deficit reduction. That's $4 trillion in recommendations. That's monstrous. That's a monumental move. When you dig into it, there are nearly 1,000 political third-rails built into it. We'll have to see what the commission ultimately recommends, because they have to vote on it before Congress can even try to approve something. Nonetheless, someone has finally put out a road map and it's going to be more and more in the public. There is a bigger political will there.
-- Written by Robert Holmes in Boston
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