US Industrial Production Increased 3.0 Percent in Jul and 5.7 Percent
in Jun But Still 8.4 Percent Below The Level Before the Global Recession,
with Output in the US Reaching a High in Feb 2020 (https://www.nber.org/cycles.html), in the Lockdown
of Economic Activity in the COVID-19 Event, United States Manufacturing
Underperforming in the
Lost Economic Cycle of the Global Recession with Economic Growth
Underperforming Below Trend Worldwide, Squeeze of Economic Activity by Carry
Trades Induced by Zero Interest Rates, United States Economic Indicators Continuing
Recovery, Dollar Devaluation and Yuan Revaluation, Fluctuating Yields of
Sovereign Securities, Increase in Prices Worldwide, World
Cyclical Slow Growth, and Government Intervention in Globalization: Part VI
Carlos M. Pelaez
© Carlos M. Pelaez, 2009,
2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.
I United States Industrial Production
IIB Squeeze of Economic Activity by Carry Trades Induced
by Zero Interest Rates
III World Financial Turbulence
IV Global Inflation
V World Economic
Slowdown
VA United States
VB Japan
VC China
VD Euro Area
VE Germany
VF France
VG Italy
VH United Kingdom
VI Valuation of Risk
Financial Assets
VII Economic Indicators
VIII Interest Rates
IX Conclusion
References
Appendixes
Appendix I The Great Inflation
IIIB Appendix on Safe
Haven Currencies
IIIC Appendix on
Fiscal Compact
IIID Appendix on
European Central Bank Large Scale Lender of Last Resort
IIIG Appendix on Deficit
Financing of Growth and the Debt Crisis
Table VI-6,
updated with every blog comment, shows that exchange rate valuations affect a
large variety of countries, in fact, almost the entire world, in magnitudes
that cause major problems for domestic monetary policy and trade flows. Dollar
devaluation/fluctuation is expected to continue because of zero fed funds rate,
expectations of rising inflation, large budget deficit of the federal government
(http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now near
zero interest rates indefinitely but with interruptions caused by risk aversion
events. The euro has devalued 34.8 percent relative to the US dollar from the
high on Jul 15, 2008 to Aug 21, 2020. There are complex economic, financial and
political effects of the withdrawal of the UK from the European Union or BREXIT
after the referendum on Jun 23, 2016 (https://next.ft.com/eu-referendum for extensive
coverage by the Financial Times). The
British pound (GBP) devalued 6.0 percent from the trough of USD/₤1.388 on Jan
2, 2009 to USD/₤1.3089 on Aug 21, 2020 and devalued 53.3 percent from the high
of USD/₤2.006 on Jul 15, 2008, exchange rate changes measuring ₤/USD. Such similar event occurred in the week of
Sep 23, 2011 reversing the devaluation of the dollar in the form of sharp
appreciation of the dollar relative to other currencies from all over the world
including the offshore Chinese yuan market. The Bank of England reduced the
Bank Rate to 0.25 percent on Aug 4, 2016, and announced new measures of quantitative
easing
(http://www.bankofengland.co.uk/publications/Pages/news/2016/008.aspx). The Bank of
England increased the policy interest rate by 0.25 percentage points to 0.75
percent at the meeting of its Monetary Policy Committee on Aug 1, 2018 (https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2018/august-2018). Column
“Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There
was a flight to safety in dollar-denominated government assets because of the
arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various
exchange rates that depreciated sharply against the dollar such as the South
African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22,
2008. Subsequently, the ZAR appreciated to the trough of ZAR 7.238/USD by Aug
15, 2010 but now depreciating 137.0 percent to ZAR 17.3822/USD on Aug 21, 2020,
which is depreciation of 48.2 percent relative to Oct 22, 2008. An example from
Asia is the Singapore Dollar (SGD) that depreciated at the peak of SGD
1.553/USD on Mar 3, 2009. The SGD depreciated by 13.2 percent to the trough of
SGD 1.348/USD on Aug 9, 2010 but is now depreciating 1.7 percent at SGD 1.3715/USD
on Aug 21, 2020 relative to the trough of depreciation but still stronger by 11.7
percent relative to the peak of depreciation on Mar 3, 2009. Another example is
the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5,
2008. The BRL appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr
30, 2010, showing depreciation of 223.6 percent relative to the trough to BRL 5.6203/USD
on Aug 21, 2020 but depreciating by 131.3 percent relative to the peak on Dec
5, 2008. At one point in 2011, the Brazilian real traded at BRL 1.55/USD and in
the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation
of more than 20 percent. The Banco Central do Brasil (BCB), Brazil’s central
bank, decreased its policy rate SELIC for ten consecutive meetings (http://www.bcb.gov.br/?INTEREST) of its
monetary policy committee, COPOM. Brazil’s central bank reduced the SELIC rate
at its most recent meeting (https://www.bcb.gov.br/en/pressdetail/2345/nota):
“232nd Meeting of the Monetary Policy Committee
(COPOM) of the Central Bank of Brazil Press Release
05/08/2020
In its 231st meeting, the COPOM unanimously decided
to lower the Selic rate to 2.00 percent per year” (https://www.bcb.gov.br/en/pressdetail/2345/nota). The Banco
Central do Brasil is engaging in repurchase operations in foreign currency
beginning Mar 18, 2020 (https://www.bcb.gov.br/en/pressdetail/2319/nota). The monetary
authorities also provides multiple measures to face the COVID-19 event (https://www.bcb.gov.br/en/pressdetail/2322/nota). The Banco
Central do Brasil also engaged in FX auctions (http://www.bcb.gov.br/en/#!/c/news/1828):
“BC announces FX auctions program 22/08/2013 6:44:00 PM
With the aim of providing FX ‘hedge” (protection) to the
economic agents and liquidity to the FX market, the Banco Central do Brasil
informs that a program of FX swap auctions and US dollar sale auctions with
repurchase program will begin, as of Friday, August 23. This program will last,
at least, until December 31, 2013. The swap auctions will occur every Monday,
Tuesday, Wednesday and Thursday, when US$500 million will be offered per day.
On Fridays, a credit line of US$1 billion will be offered to the market,
through sale auctions with repurchase agreement. If it is considered
appropriate, the Banco Central do Brasil will carry out additional operations.”
Jeffrey T.
Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012,
published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new
measures by Brazil to prevent further appreciation of its currency, including
the extension of the tax on foreign capital for three years terms, subsequently
broadened to five years, and intervention in the foreign exchange market by the
central bank. Jeff Fick, writing on “Brazil shifts tack to woo wary investors,”
on Jun 5, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324299104578527000680111188.html), analyzes the
lifting in the week of Jun 7, 2013, of the tax on foreign transactions designed
in Oct 2010 to contain the flood of foreign capital into Brazil that overvalued
its currency. Jeffrey T. Lewis, writing on “Brazil’s real closes weaker,” on
Jun 14, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323734304578545680335302180.html), analyzes
measures to contain accelerated depreciation such as currency swaps and the
lifting of the 1 percent tax on exchange derivatives on Jun 12, 2013.
Unconventional monetary policy of zero interest rates and quantitative easing
creates trends such as the depreciation of the dollar followed by Table VI-6 but
with abrupt reversals during risk aversion. The main effects of unconventional
monetary policy are on valuations of risk financial assets and not necessarily
on consumption and investment or aggregate demand.
Table VI-6,
Exchange Rates
|
|
Peak |
Trough |
∆% P/T |
Aug 21, 2020 |
∆% T Aug 21, 2020 |
∆% P Aug 21, 2020 |
|
EUR USD |
7/15 |
6/7 2010 |
|
08/21/2020 |
|
|
|
Rate |
1.59 |
1.192 |
|
1.1796 |
|
|
|
∆% |
|
|
-33.4 |
|
-1.1 |
-34.8 |
|
JPY USD |
8/18 |
9/15 |
|
08/21/2020
|
|
|
|
Rate |
110.19 |
83.07 |
|
105.81 |
|
|
|
∆% |
|
|
24.6 |
|
-27.4 |
4.0 |
|
CHF USD |
11/21 2008 |
12/8 2009 |
|
08/21/2020 |
|
|
|
Rate |
1.225 |
1.025 |
|
0.9116 |
|
|
|
∆% |
|
|
16.3 |
|
11.1 |
25.6 |
|
USD GBP |
7/15 |
1/2/ 2009 |
|
08/21/2020
|
|
|
|
Rate |
2.006 |
1.388 |
|
1.3089 |
|
|
|
∆% |
|
|
-44.5 |
|
-6.0 |
-53.3 |
|
USD AUD |
7/15 2008 |
10/27 2008 |
|
08/21/2020
|
|
|
|
Rate |
1.0215 |
1.6639 |
|
0.7162 |
|
|
|
∆% |
|
|
-62.9 |
|
16.1 |
-36.7 |
|
ZAR USD |
10/22 2008 |
8/15 |
|
08/21/2020
|
|
|
|
Rate |
11.578 |
7.238 |
|
17.1566 |
|
|
|
∆% |
|
|
37.5 |
-137.0 |
-48.2 |
|
|
SGD USD |
3/3 |
8/9 |
|
08/21/2020
|
|
|
|
Rate |
1.553 |
1.348 |
|
1.3715 |
|
|
|
∆% |
|
|
13.2 |
|
-1.7 |
11.7 |
|
HKD USD |
8/15 2008 |
12/14 2009 |
|
08/21/2020
|
|
|
|
Rate |
7.813 |
7.752 |
|
7.7504 |
|
|
|
∆% |
|
|
0.8 |
|
0.0 |
0.8 |
|
BRL USD |
12/5 2008 |
4/30 2010 |
|
08/21/2020
|
|
|
|
Rate |
2.43 |
1.737 |
|
5.6203 |
|
|
|
∆% |
|
|
28.5 |
|
-223.6 |
-131.3 |
|
CZK USD |
2/13 2009 |
8/6 2010 |
|
08/21/2020
|
|
|
|
Rate |
22.19 |
18.693 |
|
22.109 |
|
|
|
∆% |
|
|
15.7 |
|
-18.3 |
0.4 |
|
SEK USD |
3/4 2009 |
8/9 2010 |
|
08/21/2020
|
||
|
Rate |
9.313 |
7.108 |
|
8.7956 |
|
|
|
∆% |
|
|
23.7 |
|
-23.7 |
5.6 |
|
CNY USD |
7/20 2005 |
7/15 |
|
08/21/2020
|
|
|
|
Rate |
8.2765 |
6.8211 |
|
6.9195 |
-1.4 |
16.4 |
|
∆% |
|
|
17.6 |
|
Symbols:
USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound;
AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD:
Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY:
Chinese yuan; P: peak; T: trough
Note:
percentages calculated with currencies expressed in units of domestic currency
per dollar; negative sign means devaluation and no sign appreciation
Source:
http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
https://markets.ft.com/data/currencies
There
are major ongoing and unresolved realignments of exchange rates in the
international financial system as countries and regions seek parities that can
optimize their productive structures. Seeking exchange rate parity or exchange
rate optimizing internal economic activities is complex in a world of
unconventional monetary policy of zero interest rates and even negative nominal
interest rates of government obligations such as negative yields for the
two-year government bond of Germany. Regulation, trade and devaluation conflicts
should have been expected from a global recession (Pelaez and Pelaez (2007), The
Global Recession Risk, Pelaez and Pelaez, Government Intervention in
Globalization: Regulation, Trade and Devaluation Wars (2008a)): “There are
significant grounds for concern on the basis of this experience. International
economic cooperation and the international financial framework can collapse
during extreme events. It is unlikely that there will be a repetition of the
disaster of the Great Depression. However, a milder contraction can trigger
regulatory, trade and exchange wars” (Pelaez and Pelaez, Government
Intervention in Globalization: Regulation, Trade and Devaluation Wars
(2008c), 181). Chart VI-2 of the Board of Governors of the Federal Reserve
System provides the key exchange rate of US dollars (USD) per euro (EUR) from
Jan 4, 1999 to Aug 14, 2020. US recession dates are in shaded areas. The rate
on Jan 4, 1999 was USD 1.1812/EUR, declining to USD 0.8279/EUR on Oct 25, 2000,
or appreciation of the USD by 29.9 percent. The rate depreciated 21.9 percent
to USD 1.0098/EUR on Jul 22, 2002. There was sharp devaluation of the USD of
34.9 percent to USD 1.3625/EUR on Dec 27, 2004 largely because of the 1 percent
interest rate between Jun 2003 and Jun 2004 together with a form of
quantitative easing by suspension of auctions of the 30-year Treasury, which was
equivalent to withdrawing supply from markets. Another depreciation of 17.5
percent took the rate to USD 1.6010/EUR on Apr 22, 2008, already inside the
shaded area of the global recession. The flight to the USD and obligations of
the US Treasury appreciated the dollar by 22.3 percent to USD 1.2446/EUR on Oct
27, 2008. In the return of the carry trade after stress tests showed sound US
bank balance sheets, the rate depreciated 21.2 percent to USD 1.5085/EUR on Nov
25, 2009. The sovereign debt crisis of Europe in the spring of 2010 caused
sharp appreciation of 20.7 percent to USD 1.1959/EUR on Jun 6, 2010. Renewed
risk appetite depreciated the rate 24.4 percent to USD 1.4875/EUR on May 3,
2011. The rate appreciated 1.1 percent to USD 1.1833/EUR on Aug 14, 2020, which
is the last point in Chart VI-2. The data in Table VI-6 is obtained from
closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-2, US Dollars (USD) per Euro (EUR), Jan 4, 1999 to
Aug 14, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI 3 provides three currency indexes of
the dollar from Jan 4, 1995 to Aug 14, 2020. Chart VI-3A provides the overnight
fed funds rate and yields of the three-month constant maturity Treasury bill,
the ten-year constant maturity Treasury note and Moody’s Baa bond from Jan 4,
1995 to Jul 7, 2016. Chart VI-3B provides the overnight fed funds rate and
yields of the three-month constant maturity Treasury bill and the ten-year
constant maturity Treasury from Jan 4, 1995 to Aug 20, 2020.
Chart VI-3, US Dollar Currency Indexes, Jan 4, 1995-Aug 14,
2020
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-3A,
US, Overnight Fed Funds Rate, Yield of Three-Month Treasury Constant Maturity,
Yield of Ten-Year Treasury Constant Maturity and Yield of Moody’s Baa Bond, Jan
4, 1995 to Jul 25, 2016
Source:
Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
Chart VI-3B,
US, Overnight Fed Funds Rate, Yield of Three-Month Treasury Constant Maturity
and Yield of Ten-Year Treasury Constant Maturity, Jan 4, 1995 to Aug 20, 2020
Source:
Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=H15
Chart
VI-4 of the Board of Governors of the Federal Reserve System provides the
exchange rate of the US relative to the euro, or USD/EUR. During maintenance of
the policy of zero fed funds rates the dollar appreciates in periods of
significant risk aversion such as flight into US government obligations in late
2008 and early 2009 and in the various risks concerns generated by the European
sovereign debt crisis. There was depreciation of the dollar followed by recent
appreciation.
Chart VI-4, US Dollars per Euro, 2015-2020
Source: Board of Governors of the Federal Reserve System
Carry trades induced by zero interest rates increase
capital flows into emerging markets that appreciate exchange rates. Portfolio
reallocations away from emerging markets depreciate their exchange rates in
reversals of capital flows. Chart VI-4A provides the exchange rate of the
Mexican peso (MXN) per US dollar from Nov 8, 1993 to Aug 14, 2020. The first
data point in Chart VI-4A is MXN 3.1520 on Nov 8, 1993. The rate devalued to
11.9760 on Nov 14, 1995 during emerging market crises in the 1990s and the increase
of interest rates in the US in 1994 that stressed world financial markets
(Pelaez and Pelaez, International Financial Architecture 2005, The
Global Recession Risk 2007, 147-77). The MXN depreciated sharply to MXN
15.4060/USD on Mar 2, 2009, during the global recession. The rate moved to MXN
11.5050/USD on May 2, 2011, during the sovereign debt crisis in the euro area.
The rate depreciated to 11.9760 on May 9, 2013. The final data point is MXN 22.0190/USD
on Aug 14, 2020.
Chart VI-4A, Mexican Peso (MXN) per US Dollar (USD), Nov 8, 1993
to Aug 14, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
In remarkable anticipation in 2005, Professor Raghuram G. Rajan
(2005) warned of low liquidity and high risks of central bank policy rates
approaching the zero bound (Pelaez and Pelaez, Regulation of Banks and
Finance (2009b), 218-9). Professor Rajan excelled in a distinguished career
as an academic economist in finance and was chief economist of the
International Monetary Fund (IMF). Shefali Anand and Jon Hilsenrath, writing on
Oct 13, 2013, on “India’s central banker lobbies Fed,” published in the Wall
Street Journal (http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484?KEYWORDS=Rajan), interviewed
Raghuram G Rajan, who is the former Governor of the Reserve Bank of India,
which is India’s central bank (http://www.rbi.org.in/scripts/AboutusDisplay.aspx). In this
interview, Rajan argues that central banks should avoid unintended consequences
on emerging market economies of inflows and outflows of capital triggered by
monetary policy. Professor Rajan, in an interview with Kartik Goyal of
Bloomberg (http://www.bloomberg.com/news/2014-01-30/rajan-warns-of-global-policy-breakdown-as-emerging-markets-slide.html), warns of
breakdown of global policy coordination. Professor Willem Buiter (2014Feb4), a
distinguished economist currently Global Chief Economist at Citigroup (http://www.willembuiter.com/resume.pdf), writing on
“The Fed’s bad manners risk offending foreigners,” on Feb 4, 2014, published in
the Financial Times (http://www.ft.com/intl/cms/s/0/fbb09572-8d8d-11e3-9dbb-00144feab7de.html#axzz2suwrwkFs), concurs with
Raghuram Rajan. Buiter (2014Feb4) argues that international policy cooperation
in monetary policy is both in the interest of the world and the United States.
Portfolio reallocations induced by combination of zero interest rates and risk
events stimulate carry trades that generate wide swings in world capital flows.
In a speech at the Brookings Institution on Apr 10, 2014, Raghuram G. Rajan
(2014Apr10, 1, 10) argues:
“As the world seems to be struggling back to its feet after the
great financial crisis, I want to draw attention to an area we need to be
concerned about: the conduct of monetary policy in this integrated world. A
good way to describe the current environment is one of extreme monetary easing
through unconventional policies. In a world where debt overhangs and the need
for structural change constrain domestic demand, a sizeable portion of the effects
of such policies spillover across borders, sometimes through a weaker exchange
rate. More worryingly, it prompts a reaction. Such competitive easing occurs
both simultaneously and sequentially, as I will argue, and both advanced
economies and emerging economies engage in it. Aggregate world demand may be
weaker and more distorted than it should be, and financial risks higher. To ensure
stable and sustainable growth, the international rules of the game need to be
revisited. Both advanced economies and emerging economies need to adapt, else I
fear we are about to embark on the next leg of a wearisome cycle. A first step
to prescribing the right medicine is to recognize the cause of the sickness.
Extreme monetary easing, in my view, is more cause than medicine. The sooner we
recognize that, the more sustainable world growth we will have.”
Professor Raguram G Rajan, former governor of the Reserve Bank
of India, which is India’s central bank, warned about risks in high valuations
of asset prices in an interview with Christopher Jeffery of Central Banking Journal on Aug 6, 2014 (http://www.centralbanking.com/central-banking-journal/interview/2358995/raghuram-rajan-on-the-dangers-of-asset-prices-policy-spillovers-and-finance-in-india). Professor
Rajan demystifies in the interview “competitive easing” by major central banks
as equivalent to competitive devaluation.
Chart VI-4B provides the rate of the Indian rupee (INR) per US
dollar (USD) from Jan 2, 1973 to Aug 14, 2020. The first data point is INR
8.0200 on Jan 2, 1973. The rate depreciated sharply to INR 51.9600 on Mar 3,
2009, during the global recession. The rate appreciated to INR 44.0300/USD on
Jul 28, 2011 in the midst of the sovereign debt event in the euro area. The
rate overshot to INR 68.8000 on Aug 28, 2013. The final data point is INR 74.8700/USD
on Aug 14, 2020.
Chart VI-4B, Indian Rupee (INR) per US Dollar (USD), Jan 2,
1973 to Aug 14, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-5 provides the exchange rate of JPY (Japan yen)
per USD (US dollars). The first data point on the extreme left is JPY
357.7300/USD for Jan 14, 1971. The JPY has appreciated over the long term relative
to the USD with fluctuations along an evident long-term appreciation. Before
the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007. The
use of the JPY as safe haven is evident by sharp appreciation during the global
recession to JPY 110.4800/USD on Aug 15, 2008, and to JPY 87.8000/USD on Jan
21, 2009. The final data point in Chart VI-5 is JPY 106.4900/USD on Aug 14, 2020
for appreciation of 14.2 percent relative to JPY 124.0900/USD on Jun 29, 2007
before the global recession and expansion characterized by recurring bouts of
risk aversion. Takashi Nakamichi and Eleanor Warnock, writing on “Japan lashes
out over dollar, euro,” on Dec 29, 2012, published in the Wall Street
Journal (http://professional.wsj.com/article/SB10001424127887323530404578207440474874604.html?mod=WSJ_markets_liveupdate&mg=reno64-wsj),
analyze the “war of words” launched by Japan’s new Prime Minister Shinzo Abe
and his finance minister Taro Aso, arguing of deliberate devaluations of the
USD and EUR relative to the JPY, which are hurting Japan’s economic activity.
Gerard Baker and Jacob M. Shlesinger, writing on “Bank of Japan’s Kuroda
signals impatience with Abe government,” on May 23, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303480304579579311491068756?KEYWORDS=bank+of+japan+kuroda&mg=reno64-wsj),
analyze concerns of the Governor of the Bank of Japan Haruhiko Kuroda that the
JPY has strengthened relative to the USD, partly eroding earlier
depreciation. The data in Table VI-6 is
obtained from closing dates in New York published by the Wall Street Journal
(http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, Jan
4, 1971-Aug 14, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
The causes of the financial crisis and global recession were
interest rate and housing subsidies and affordability policies that encouraged
high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial
Regulation after the Global Recession (2009a), 157-66, Regulation of
Banks and Finance (2009b), 217-27, International Financial Architecture
(2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization
and the State Vol. II (2008b), 197-213, Government Intervention in
Globalization (2008c), 182-4). Several past comments of this blog elaborate
on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html
Zero interest rates in the United States forever tend to
depreciate the dollar against every other currency if there is no risk aversion
preventing portfolio rebalancing toward risk financial assets, which include
the capital markets and exchange rates of emerging-market economies. The
objective of unconventional monetary policy as argued by Yellen 2011AS) is to
devalue the dollar to increase net exports that increase US economic growth.
Increasing net exports and internal economic activity in the US is equivalent
to decreasing net exports and internal economic activity in other countries.
Continental territory, rich endowment of natural resources,
investment in human capital, teaching and research universities, motivated
labor force and entrepreneurial initiative provide Brazil with comparative
advantages in multiple economic opportunities. Exchange rate parity is critical
in achieving Brazil’s potential but is difficult in a world of zero interest
rates. Chart IV-6 of the Board of Governors of the Federal Reserve System
provides the rate of Brazilian real (BRL) per US dollar (USD) from BRL
1.2074/USD on Jan 4, 1999 to BRL 5.3881/USD on Aug 14, 2020. The rate reached
BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on
Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008
during worldwide flight from risk. The rate appreciated again by 41.3 percent
to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 5.3881/USD
on Aug 14, 2020 for depreciation of 250.4 percent. The data in Table VI-6 is
obtained from closing dates in New York published by the Wall Street Journal
(http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).
Chart VI-6, Brazilian Real (BRL) per US Dollar
(USD) Jan 4, 1999 to Aug 14, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-7 of the Board of Governors of the Federal
Reserve System provides the history of the BRL beginning with the first data
point of BRL 0.8400/USD on Jan 2, 1995. The rate jumped to BRL 2.0700/USD on
Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD
on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880 on Sep 21, 2001
relative to Mar 3, 1999.
Chart VI-7, Brazilian Real (BRL) per US Dollar (USD), Jan 2,
1995 to Aug 14, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Table VI-2
provides the Euro/Dollar (EUR/USD) exchange rate and Chinese Yuan/Dollar
(CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting
from monetary policy in the US and capital control/exchange rate policy in
China. The ultimate intentions are the same: promoting internal economic
activity at the expense of the rest of the world. The easy money policy of the
US was deliberately or not but effectively to devalue the dollar from USD
1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3
percent. The flight into dollar assets after the global recession caused
revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the
temporary interruption of the sovereign risk issues in Europe from Apr to Jul
2010, shown in Table VI-4 below, the dollar has revalued to USD 1.1796/EUR on Aug
21, 2020 or by 1.0 percent {[(1.1796/1.192)-1]100 = -1.0%}. Yellen (2011AS, 6)
admits that Fed monetary policy results in dollar devaluation with the
objective of increasing net exports, which was the policy that Joan Robinson
(1947) labeled as “beggar-my-neighbor” remedies for unemployment. Risk aversion
erodes devaluation of the dollar. China fixed the CNY to the dollar for an
extended period at a highly undervalued level of around CNY 8.2765/USD subsequently
revaluing to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent. After fixing
again the CNY to the dollar, China devalued to CNY 6.9195/USD on Fri Aug 21, 2020,
or by 1.4 percent, for cumulative revaluation of 16.4 percent. The final row of
Table VI-2 shows: revaluation of 0.6 percent in the week of Jul 31, 2020;
revaluation of 0.1 percent in the week of Aug 7, 2020; revaluation of 0.3
percent in the week of Aug 14, 2020; and revaluation of 0.4 percent in the week
of Aug 21, 2020. There could be reversal of revaluation to devalue the Yuan,
but the outcome depends on ongoing negotiations.
Table VI-2, Dollar/Euro
(USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate
|
USD/EUR |
12/26/03 |
7/14/08 |
6/07/10 |
08/21/20 |
|
Rate |
1.1423 |
1.5914 |
1.192 |
1.1796 |
|
CNY/USD |
01/03 |
07/21 |
7/15 |
08/21/20 |
|
Rate |
8.2765 |
6.8211 |
6.8211 |
6.9195 |
|
Weekly Rates |
07/31/2020 |
08/07/2019 |
08/14/2020 |
08/21/20 |
|
CNY/USD |
6.9752 |
6.9678 |
6.9503 |
6.9195 |
|
∆% from Earlier Week* |
0.6% |
0.1% |
0.3% |
0.4% |
*Negative sign is
depreciation; positive sign is appreciation
Source: http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
Professor Edward P Lazear
(2013Jan7), writing on “Chinese ‘currency manipulation’ is not the problem,” on
Jan 7, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323320404578213203581231448.html), provides clear thought on the role of the yuan in trade
between China and the United States and trade between China and Europe. There
is conventional wisdom that Chinese exchange rate policy causes the loss of
manufacturing jobs in the United States, which is shown by Lazear (2013Jan7) to
be erroneous. The fact is that manipulation of the CNY/USD rate by China has
only minor effects on US employment. Lazear (2013Jan7) shows that the movement
of monthly exports of China to its major trading partners, United States and
Europe, since 1995 cannot be explained by the fixing of the CNY/USD rate by
China. The period is quite useful because it includes rapid growth before 2007,
contraction until 2009 and weak subsequent expansion. Professor Charles W.
Calomiris, at Columbia University, writing in the Wall Street Journal on Apr 17, 2017, provides perceptive analysis
of China’s exchange rate. According to Calomiris (2017Apr), long-run exchange
rate appreciation in China originates in productivity growth in accordance with
Harrod (1939), Balassa (1964) and Samuelson (1964). In this view, reforms
allowing increasing participation of private economic activity caused an
increase in productivity measured by Calomiris (2017Apr) as only about 3
percent of US productivity around 1978 to current 13 percent of US
productivity. Calomiris (2017Apr) attributes recent depreciation of the Yuan to
rapidly increasing debt, slowing growth and inflation motivating capital
flight. Chart VI-1 of the Board of Governors of the Federal Reserve System
provides the CNY/USD exchange rate from Jan 3, 1995 to Aug 14, 2020 together
with US recession dates in shaded areas. China fixed the CNY/USD rate for an
extended period as shown in the horizontal segment from 1995 to 2005. There was
systematic revaluation of 17.6 percent from CNY 8.2765 on Jul 21, 2005 to CNY
6.8211 on Jul 15, 2008. China fixed the CNY/USD rate until Jun 7, 2010, to
avoid adverse effects on its economy from the global recession, which is shown
as a horizontal segment from 2009 until mid-2010. China then continued the
policy of appreciation of the CNY relative to the USD with oscillations until
the beginning of 2012 when the rate began to move sideways followed by a final
upward slope of devaluation that is measured in Table VI-2A but virtually
disappeared in the rate of CNY 6.3589/USD on Aug 17, 2012 and was nearly
unchanged at CNY 6.3558/USD on Aug 24, 2012. China then appreciated 0.2 percent
in the week of Dec 21, 2012, to CNY 6.2352/USD for cumulative 1.9 percent
revaluation from Oct 28, 2011 and left the rate virtually unchanged at CNY
6.2316/USD on Jan 11, 2013, moving to CNY 6.9501/USD on Aug 14, 2020, which is
the last data point in Chart VI-1. Revaluation of
the CNY relative to the USD of 16.4 percent by Aug 21, 2020 has not reduced the
trade surplus of China but reversal of the policy of revaluation could result
in international confrontation. The interruption with upward slope in the final
segment on the right of Chart VI-I is measured as virtually stability in Table
VI-2A followed with decrease or revaluation and subsequent increase or
devaluation. The final segment shows decline or revaluation with another upward
move or devaluation. Linglin Wei, writing on “China intervenes to lower yuan,”
on Feb 26, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304071004579406810684766716?KEYWORDS=china+yuan&mg=reno64-wsj), finds from informed sources that the central bank of China
conducted the ongoing devaluation of the yuan with the objective of driving out
arbitrageurs to widen the band of fluctuation. There is concern if the policy
of revaluation is changing to devaluation.
Chart VI-1, Chinese Yuan (CNY) per US Dollar (USD), Business
Days, Jan 3, 1995-Aug 14, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-1A provides the daily CNY/USD rate from Jan 5,
1981 to Aug 7, 2020. The exchange rate was CNY 1.5418/USD on Jan 5, 1981. There
is sharp cumulative depreciation of 107.8 percent to CNY 3.2031 by Jul 2, 1986,
continuing to CNY 5.8145/USD on Dec 29, 1993 for cumulative 277.1 percent since
Jan 5, 1981. China then devalued sharply to CNY 8.7117/USD on Jan 7, 1994 for
49.8 percent relative to Dec 29, 1993 and cumulative 465.0 percent relative to
Jan 5, 1981. China then fixed the rate at CNY 8.2765/USD until Jul 21, 2005 and
revalued as analyzed in Chart VI-1. The final data point in Chart VI-1A is CNY 6.9670/USD
on Aug 7, 2020. To be sure, China fixed the exchange rate after
substantial prior devaluation. It is unlikely that the devaluation could have
been effective after many years of fixing the exchange rate with high inflation
and multiple changes in the world economy. The argument of Lazear (2013Jan7) is
still valid in view of the lack of association between monthly exports of China
to the US and Europe since 1995 and the exchange rate of China.
Chart VI-1A, Chinese Yuan (CNY) per US Dollar (USD), Business
Days, Jan 5, 1981-Aug 14, 2020
Note: US Recessions in Shaded Areas
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
Chart VI-1B provides
finer details with the rate of Chinese Yuan (CNY) to the US Dollar (USD) from
Oct 28, 2011 to Aug 14, 2020. There have been alternations of revaluation and
devaluation. The initial data point is CNY 6.5370 on Nov 3, 2011. There is an
episode of devaluation from CNY 6.2790 on Apr 30, 2012 to CNY 6.3879 on Jul 25,
2012, or devaluation of 1.4 percent. Another devaluation is from CNY 6.0402/USD
on Jan 21, 2014 to CNY 6.9501/USD on Aug 14, 2020, or devaluation of 15.1
percent. Calomiris (2017Apr) attributes recent depreciation of the Yuan to
rapidly increasing debt, slowing growth and inflation motivating capital flight.
China
is the second largest holder of US Treasury securities with $1074.4 billion in
Jun 2020, decreasing 0.9 percent from $1083.7 billion in May 2020 while
decreasing $38.1 billion from Jun 2019 or 3.4 percent. The United States
Treasury estimates US government debt held by private investors at $13,886
billion in Mar 2020 (Fiscal Year 2020). China’s holding of US Treasury
securities represents 7.7 percent of US government marketable interest-bearing
debt held by private investors (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Min Zeng,
writing on “China plays a big role as US Treasury yields fall,” on Jul 16,
2014, published in the Wall Street Journal (http://online.wsj.com/articles/china-plays-a-big-role-as-u-s-treasury-yields-fall-1405545034?tesla=y&mg=reno64-wsj), finds that
acceleration in purchases of US Treasury securities by China has been an
important factor in the decline of Treasury yields in 2014. Japan increased its
holdings from $1122.8 billion in Jun 2019 to $1261.3 billion in Jun 2020 or 12.3
percent. The combined holdings of China and Japan in Jun 2020 add to $2335.7
billion, which is equivalent to 16.8 percent of US government marketable
interest-bearing securities held by investors of $13,886 billion in Mar 2020
(Fiscal Year 2020) (https://www.fiscal.treasury.gov/reports-statements/treasury-bulletin/). Total
foreign holdings of Treasury securities increased from $6625.9 billion in Jun
2019 to $7038.9 billion in Jun 2020, or 6.2 percent. The US continues to
finance its fiscal and balance of payments deficits with foreign savings (see
Pelaez and Pelaez, The Global Recession Risk (2007). Professor Martin Feldstein, at Harvard
University, writing on “The Debt Crisis Is Coming Soon,” published in the Wall Street Journal on Mar 20, 2019 (https://www.wsj.com/articles/the-debt-crisis-is-coming-soon-11553122139?mod=hp_opin_pos3), foresees a
US debt crisis with deficits moving above $1 trillion and debt above 100
percent of GDP. A point of saturation of
holdings of US Treasury debt may be reached as foreign holders evaluate the
threat of reduction of principal by dollar devaluation and reduction of prices
by increases in yield, including possibly risk premium. Shultz et al (2012)
find that the Fed financed three-quarters of the US deficit in fiscal year
2011, with foreign governments financing significant part of the remainder of
the US deficit while the Fed owns one in six dollars of US national debt.
Concentrations of debt in few holders are perilous because of sudden exodus in
fear of devaluation and yield increases and the limit of refinancing old debt
and placing new debt. In their classic work on “unpleasant monetarist
arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of
monetary policy by fiscal policy (emphasis added):
“Imagine that
fiscal policy dominates monetary policy. The fiscal authority independently
sets its budgets, announcing all current and future deficits and surpluses and
thus determining the amount of revenue that must be raised through bond sales
and seignorage. Under this second coordination scheme, the monetary authority
faces the constraints imposed by the demand for government bonds, for it must
try to finance with seignorage any discrepancy between the revenue demanded by
the fiscal authority and the amount of bonds that can be sold to the public.
Suppose that the demand for government bonds implies an interest rate on bonds
greater than the economy’s rate of growth. Then if the fiscal authority runs
deficits, the monetary authority is unable to control either the growth rate of
the monetary base or inflation forever. If the principal and interest due on
these additional bonds are raised by selling still more bonds, so as to
continue to hold down the growth of base money, then, because the interest rate
on bonds is greater than the economy’s growth rate, the real stock of bonds
will growth faster than the size of the economy. This cannot go on forever,
since the demand for bonds places an upper limit on the stock of bonds relative
to the size of the economy. Once that limit is reached, the principal and
interest due on the bonds already sold to fight inflation must be financed, at
least in part, by seignorage, requiring the creation of additional base money.”
Chart VI-1B, Chinese Yuan (CNY) per US Dollar (US), Business
Days, Oct 28, 2011-Aug 14, 2020
Source: Board of Governors of the Federal Reserve System
https://www.federalreserve.gov/datadownload/Choose.aspx?rel=h10
© Carlos M. Pelaez, 2009,
2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020.
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