An Urban's Rural View

Currency manipulation is in the news again. As President Barack Obama's Trans-Pacific Partnership trade treaty closes in on the finish line, some Congressmen threaten to thwart any deal that doesn't crack down on those conniving foreigners who weaken their currencies to gain an unfair trade advantage. (http://tiny.cc/…)

So it's worth asking: What is currency manipulation? Just who are the connivers?

Consider two candidates. Country A intervenes in foreign-currency markets with the express purpose of increasing its exports. Country B doesn't intervene in foreign-exchange markets at all and has no intention to devalue its currency; it merely prints more of its own money to stimulate domestic demand.

A sounds like a currency manipulator; B is just conducting monetary policy. B's actions lack what criminal lawyers call "mens rea" -- a "guilty mind," the intention to do something wrong.

But some crimes don't require evil intent to be indictable. Damaging impact is all that matters. In our hypothetical, the market impact of what A and B do could easily be the same: a devalued currency that confers a trade advantage.

Indeed, if country B has a large economy and a currency that dominates international transactions, its monetary policy might have an even bigger effect on currency markets than the direct intervention of a less significant country A.

And that's something to consider as we contemplate inserting tougher currency-manipulation standards into new trade agreements. Unless these standards are very carefully drafted, our Federal Reserve could end up atop the world's ten-most-wanted list of currency manipulators.

No country has more potential to influence currency markets than the U.S. Despite the rise of China the U.S. still has the largest economy in the world. The dollar is the world's reserve currency: Every foreign central bank must hold dollars, and much of the world's trade is conducted in dollars, even trade to which no American is a party.

In 2009, with the American economy reeling from the shock waves of the financial crash, the Fed began a massive program of bond buying (read: money printing) called "quantitative easing." It created tens of billions of new dollars a month, all in the name of encouraging bank lending and economic activity.

No one at the Fed explicitly mentioned improving America's export competitiveness. There was no evidence of mens rea. But the effect was dramatic. The dollar went down. And foreign countries, especially developing countries, complained mightily. We were, as far as they were concerned, manipulating our currency.

Maybe a clever lawyer could draft a codicil to the Trans-Pacific Partnership agreement that would nab country A-type manipulators while letting country B off scot-free. Drafting one that makes economic sense and is acceptable to TPP trading partners won't be as easy.

Consider the definition of currency manipulation the U.S. automakers have proposed. As described by Dan Ikenson in Forbes, "If a country has a current account surplus over a six-month period, adds to its foreign exchange reserves over that period, and has more than adequate foreign exchange reserves (defined as more than enough to cover three months of normal imports), then that country is manipulating its currency." (http://tiny.cc/…)

This proposal verges on being a bill of attainder, something our constitution prohibits. It defines particular parties (in this case certain Asian governments) as currency criminals almost as clearly as if they were named.

The U.S., of course, is defined out: We never run a current account surplus and we have no need of foreign-exchange reserves because we can create the world's reserve currency at will. The proposal is not only one-sided; in Ikenson's words, it "whiffs of financial imperialism." None of our TPP partners would accept it.

Much of the currency manipulation in today's world is closer to the country-B variety than the country-A. It's monetary policy rather than intervention in foreign-exchange markets. The U.S. is no longer the guilty party; our economy is relatively strong and the Fed is moving towards a less-stimulatory stance.

It's the turn of Japan and the European Union to practice "quantitative easing." Their economies are weak -- so weak some countries are openly talking their currencies down, straddling the country-A/country-B line. (http://tiny.cc/…)

This is a problem for the U.S. The dollar is soaring; our export competitiveness is suffering. But it's not a problem that can be solved by writing provisos into new trade deals, unless the legislators' unspoken intent is to stifle those deals.

In the end, the definition of currency manipulation seems likely to continue to prove elusive. We all think, as a Supreme Court once said of pornography, "I'll know it when I see it." But capturing it in terms that solve the problem and avoid unintended consequences and can win broad acceptance? That is a major challenge.

Urban Lehner

urbanity@hotmail.com

(CZ)

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