Currency Wars could trigger 1930s-style collapse

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Mervyn King warning : A 1930s-style trade war would be 'ruinous'


Mervyn King last night warned that a 1930s-style trade war would 'lead to a disastrous collapse in activity around the world'.

The Governor of the Bank of England said a return to the protectionist policies that exacerbated the Great Depression risked tipping the global economy back into recession.

'Every country would suffer ruinous consequences - including our own,' said King.

The governor said that Britain's 'nice' decade of low inflation and solid economic growth would be replaced by a 'sober' decade.

'A sober decade may not be fun but it is necessary for our economic health,' he said.


The governor also hinted at a fresh round of Quantitative Easing to boost the economy by flooding it with newly-minted money.

King called for leading nations to agree a 'grand bargain' of policies to avoid a return to protectionism.

But fears are rising that countries will impose tariffs on imports in a desperate effort to protect their own manufacturers - a move that would derail the recovery.

A global currency war has broken out as countries battle to devalue their exchange rates to boost exports and drive economic growth.

King said that for the global economy to 'rebalance', countries-such as China needed to import more and export less.

But the Chinese central bank yesterday raised interest rates for the first time since 2007, in a shock move to tame inflation.

Economists pointed out that it would encourage the Chinese to save rather than spend - the reverse of what King has called for. King said: 'Lower domestic demand in the deficit countries [such as the US and UK] must be accompanied by strong growth in domestic demand in the surplus countries [like China] if the world economy is not to slow.

'That will require a change in the strategy of those countries that have built their own policies around export-led growth.' The governor said British exporters must create half a million new jobs to boost the sale of goods overseas and make up for looming job cuts in the public sector.

'To achieve a rebalancing we need to sell more to, and buy less from, economies overseas,' he said.

'Such adjustment is unlikely to be smooth. Unless the fall in domestic spending coincides with the necessary increase in exports, the path for the economy will be bumpy.' It came as a CBI survey showed exports fell this month at their fastest rate since February.

And respected think-tank the National Institute of Economic and Social Research forecast a 'sluggish' recovery in the UK with growth of 1.6 per cent this year and next, and 2 per cent in 2012.




Mervyn King: A 1930s-style trade war would be 'ruinous' | Mail Online

 

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King says imbalances could trigger 1930s-style collapse

By Matt Falloon

LONDON | Wed Oct 20, 2010 7:18am BST

LONDON (Reuters) - The world is facing a dangerous trade war which could spark a 1930s-style collapse unless policymakers can agree a common path on managing currencies and demand imbalances, Bank of England Mervyn King said on Tuesday.

Speaking days before a meeting of G20 policymakers in Korea, King called for a "grand bargain" between major economies on exchange rates, rules for capital flows and realigning domestic demand to put the recovering global economy on a surer footing.

King, the first G7 policymaker to so explicitly raise the prospect of a trade war since a row over global imbalances erupted this month, said "major surplus and deficit countries are pursuing economic strategies that are in direct conflict".

"The need to act in the collective interest has yet to be recognised, and, unless it is, it will be only a matter of time before one or more countries resort to trade protectionism as the only domestic instrument to support a necessary rebalancing," King said in a speech in central England.

"That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world. Every country would suffer ruinous consequences -- including our own."

His comments will put pressure on finance ministers and central bankers from the G20 group of major developed and developing economies who meet in South Korea at the end of this week, where currency tensions are set to dominate the agenda.

A meeting at the International Monetary Fund this month failed to resolve the escalating diplomatic spat over currencies and the dilemma of big trade deficits in countries such as the United States and big surpluses in nations such as China.

The United States and Europe want China to let its yuan currency appreciate, while China has criticised loose U.S. monetary policy for distorting the global economy and Japan has been selling yen to stave off deflation.

GOOD WILL GONE

There are fears that the United States could slap trade tariffs on imports from China which could prompt others to retaliate and spark a global trade war.

"There is more to this issue than a bilateral conflict between China and the United States," King said, lamenting that the good will built up during the global financial crisis had faded.

Other key global figures have started to speak out on the issue. World Trade Organisation chief Pascal Lamy said on Tuesday that the row over currency policies could threaten global trade and economic recovery.

U.S. Treasury Secretary Timothy Geithner on Monday vowed that the world's biggest economy would not devalue the dollar to boost its exports, arguing that deliberately weakening a currency was no way to secure prosperity.

Emerging economies are concerned the U.S. Federal Reserve's growth-boosting quantitative easing has weakened the dollar, boosted capital flows into their markets and inflating the value of their currencies -- hurting export competitiveness.

China's central bank surprised on Tuesday with its first interest rate rise in nearly three years, leading some analysts to suggest a deal with the United States to strengthen the yuan to soothe these international tensions.

However, other analysts said China would still carefully control any appreciation of the yuan.

"The risk is that unless agreement on a common path of adjustment is reached, conflicting policies will result in an undesirably low level of world output, with all countries worse off as a result," King said.

- King says imbalances could trigger 1930s-style collapse | Reuters

 

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CBI head warns of "scary" trade war prospect

(Reuters) - Finance ministers at the G20 meeting in South Korea should avoid a single-minded focus on currency issues and work to avert the "scary" prospect of a trade war, the head of Britain's biggest business lobby said.

CBI director-general Richard Lambert, whose body represents companies such as Barclays, BP, GlaxoSmithKline and thousands of others, said that his members opposed any new trade barriers against China.

"When you see the U.S. Congress talking about trade barriers against China and China using the language they are in return, and the Brazilian finance minister talking about trade wars, it all gets a bit scary," he told Reuters in an interview.

Finance ministers and central bankers from the Group of 20 top developed and emerging economies are now meeting in South Korea to discuss how to manage currency, trade and macroeconomic imbalances ahead of a leaders' meeting in Seoul next month.

U.S. proposals for numerical targets for countries' trade deficits and surpluses have already run into stiff opposition, prompting doubts that an accord will be reached on rejecting currency devaluations.

Lambert, a former editor of the Financial Times and one-time Bank of England policymaker, said the impact of currency strength on export performance had lessened during his lifetime due to ever more complex global supply chains.

"You should have more things on the table than just the exchange rate," he said in the interview at the CBI's central London headquarters. "If you just go nose to nose on the renminbi rate you are not going to get very far."

He backed proposals by Bank Governor Mervyn King for a "grand bargain" between major economies on exchange rates, rules for capital flows and realigning domestic demand to put the recovering global economy on a surer footing.

King had warned of a risk of return to 1930s-style protectionism with ruinous consequences in a speech on Tuesday.

"The cohesion that came through at the time of the G20 in London (last year) does seem to be dissipating and that gets quite risky," Lambert said.

UK BUSINESS

Britain's exporters have had few reasons to complain about the exchange rate as sterling has fallen by a quarter on a trade-weighted basis since mid 2007.

To date this decline has led to little improvement in Britain's trade deficit.

Lambert attributed this in part to exporters opting to boost profit margins and cashflow in the financial crisis, rather than seek higher market share. But he forecast a positive net contribution to British GDP from foreign trade in 2011.

He reiterated the CBI's broad support for the hefty public spending cuts detailed in chancellor George Osborne's spending review on Wednesday, but criticised a bank levy planned to bring in 2.5 billion pounds a year.

"I worry about bank levies because I think that they will be paid for by their customers," he said. "The shape of lending will be more subdued than would otherwise have been the case," though he said the immediate extra impact would be small as many banks had anticipated such a charge.

Overall, the fiscal tightening would enable the Bank to maintain its ultra-loose policy framework, though he doubted a majority of members would join Monetary Policy Committee member Adam Posen and vote for more quantitative easing next month.

"The economy is doing rather better right now than many people thought likely a few months ago, and inflation is rather higher than the MPC forecast," Lambert said. "The way I read the minutes is they don't seem as if the MPC is preparing us for a renewed burst of quantitative easing next month."


- CBI head warns of scary trade war prospect | Reuters