baja
10-07-2010, 02:18 AM
SAN FRANCISCO (MarketWatch) — Avoid protectionism.
If there’s been one mantra among political and economic leaders since the financial crisis rocked the world two years ago, it’s been to avoid protectionist policies at all costs.
History tells us, if not Fed Governor Ben Bernanke, that it was the headlong rush among countries into protectionist trade policies after the stock market crash of 1929 and subsequent financial crisis that sent the world spiraling into the Great Depression in the 1930s.
S&P on the future of bank ratings
Dodd-Frank isn't enough to remove sovereign support of the ratings of too-big-to-fail banks. More rule-making is needed, but a more stable regulatory environment and less risk-taking may balance their ratings, says Craig Parmelee of S&P. tells Lisa Lee
With everybody hoarding their chips, economies from the U.S. to Europe and Asia effectively shut down. So that’s been what political and economic leaders have warned against in every speech and conference since Lehman Brothers collapsed. And that’s what they’ll warn against in this weekend’s International Monetary Fund meeting in Washington D.C. also.
But unless some historic agreement can be whipped up among the canapes and photo ops during the weekend, that’s right where the world is heading, pell-mell.
Japan’s frantic attempts to stem the yen’s rise in the past month — first with a currency intervention and then with a surprise cut in interest rates — are the latest and most dramatic examples of countries trying to fight off the ravaging effects of the falling dollar on their economies and trade scenarios.
Brazil, Australia, Israel, Canada, even Switzerland, to name a few, are all struggling with higher currencies that hurt their exports; some trying to balance the loss in competitiveness abroad with much needed hikes in interest rates at home as their economies begin to recover. Meanwhile, even as the U.S. and Europe begin to take out the big guns in their battle to convince China to slash the value of its renminbi, we are both happy to watch the dollar fall and keep the euro from rising anymore so we can try to export our own ways out of recession. Even though that’s never worked before.
Treasury Secretary Tim Geithner raised the stakes in the showdown with China on Wednesday, blaming the country for the beginnings of what some media and economists are now calling a currency war. See story on Geithner stepping up pressure on China.
The term “currency war” made some good headlines this week, but it’s probably too strong for where we are right now. If the U.S. and Europe and China start slinging trade arrows to punish each other, then we are in danger of a 1930s-style meltdown.
In the meantime, stocks are rocking and gold is soaring on low rates and weak currencies as central bankers rush to declare that they will buy as many bonds as needed to keep bond yields — i.e. interest rates — low.
Stock bulls see the low rates stimulating corporate borrowing and hope it will spread to consumers. Gold bugs see the low rates ultimately creating massive inflation and a run from all currencies into the precious metal. Both scenarios are possible. But a third one is that at some point a sign of economic growth and the end of easy money ignite a massive run out of bonds and shakes global markets, stocks, commodities, currencies and derivatives alike.
That’s the risk. As long as the battle to keep money flowing escalates, the reversal could be all the more painful.
No major central bank wants to be the first to prick this bubble. Some commentators claim their stubbornness will cost them their independence from government control at some point. I don’t know. But I sure miss the days of the German Bundesbank thumbing its nose at the political winds in Bonn twice a month in the 1990s and maintaining its own anti-inflationary stance with as high rates as it thought necessary.
The banks are trapped, and so promising calm and lining up the money machines. The politicians are trapped, so loudly blaming each other in different countries. The consumers are trapped without jobs. Which brings us to companies, and to corporate earnings season.
With an 11th-hour deal to align currency expectations globally this weekend increasingly unlikely, the markets will only have third-quarter corporate earnings to look forward to next week when they begin in earnest. Estimates point to a weaker-than-expected season overall, but you never know. Financial earnings will be crucial.
The debate about a tipping point in the global economy is about to be settled, one way or another. But if we continue heading down the currency road to ruin, history will not be on our side.
David Callaway is editor-in-chief of MarketWatch.
If there’s been one mantra among political and economic leaders since the financial crisis rocked the world two years ago, it’s been to avoid protectionist policies at all costs.
History tells us, if not Fed Governor Ben Bernanke, that it was the headlong rush among countries into protectionist trade policies after the stock market crash of 1929 and subsequent financial crisis that sent the world spiraling into the Great Depression in the 1930s.
S&P on the future of bank ratings
Dodd-Frank isn't enough to remove sovereign support of the ratings of too-big-to-fail banks. More rule-making is needed, but a more stable regulatory environment and less risk-taking may balance their ratings, says Craig Parmelee of S&P. tells Lisa Lee
With everybody hoarding their chips, economies from the U.S. to Europe and Asia effectively shut down. So that’s been what political and economic leaders have warned against in every speech and conference since Lehman Brothers collapsed. And that’s what they’ll warn against in this weekend’s International Monetary Fund meeting in Washington D.C. also.
But unless some historic agreement can be whipped up among the canapes and photo ops during the weekend, that’s right where the world is heading, pell-mell.
Japan’s frantic attempts to stem the yen’s rise in the past month — first with a currency intervention and then with a surprise cut in interest rates — are the latest and most dramatic examples of countries trying to fight off the ravaging effects of the falling dollar on their economies and trade scenarios.
Brazil, Australia, Israel, Canada, even Switzerland, to name a few, are all struggling with higher currencies that hurt their exports; some trying to balance the loss in competitiveness abroad with much needed hikes in interest rates at home as their economies begin to recover. Meanwhile, even as the U.S. and Europe begin to take out the big guns in their battle to convince China to slash the value of its renminbi, we are both happy to watch the dollar fall and keep the euro from rising anymore so we can try to export our own ways out of recession. Even though that’s never worked before.
Treasury Secretary Tim Geithner raised the stakes in the showdown with China on Wednesday, blaming the country for the beginnings of what some media and economists are now calling a currency war. See story on Geithner stepping up pressure on China.
The term “currency war” made some good headlines this week, but it’s probably too strong for where we are right now. If the U.S. and Europe and China start slinging trade arrows to punish each other, then we are in danger of a 1930s-style meltdown.
In the meantime, stocks are rocking and gold is soaring on low rates and weak currencies as central bankers rush to declare that they will buy as many bonds as needed to keep bond yields — i.e. interest rates — low.
Stock bulls see the low rates stimulating corporate borrowing and hope it will spread to consumers. Gold bugs see the low rates ultimately creating massive inflation and a run from all currencies into the precious metal. Both scenarios are possible. But a third one is that at some point a sign of economic growth and the end of easy money ignite a massive run out of bonds and shakes global markets, stocks, commodities, currencies and derivatives alike.
That’s the risk. As long as the battle to keep money flowing escalates, the reversal could be all the more painful.
No major central bank wants to be the first to prick this bubble. Some commentators claim their stubbornness will cost them their independence from government control at some point. I don’t know. But I sure miss the days of the German Bundesbank thumbing its nose at the political winds in Bonn twice a month in the 1990s and maintaining its own anti-inflationary stance with as high rates as it thought necessary.
The banks are trapped, and so promising calm and lining up the money machines. The politicians are trapped, so loudly blaming each other in different countries. The consumers are trapped without jobs. Which brings us to companies, and to corporate earnings season.
With an 11th-hour deal to align currency expectations globally this weekend increasingly unlikely, the markets will only have third-quarter corporate earnings to look forward to next week when they begin in earnest. Estimates point to a weaker-than-expected season overall, but you never know. Financial earnings will be crucial.
The debate about a tipping point in the global economy is about to be settled, one way or another. But if we continue heading down the currency road to ruin, history will not be on our side.
David Callaway is editor-in-chief of MarketWatch.