Thursday’s coordinated currency intervention by South Korea, Taiwan, the Philippines, and Thailand is just the start of what will happen should the dollar keep sliding.
Most export-heavy countries around the world are far from ready to address the hard changes at home required to deal with a weak-dollar world.
Their economies are growing fast. Yet for many leaders, this speedy growth is the only real legitimacy they have with their citizens, without which they could be in deep trouble.
Thus they’ll fight tooth and nail to forestall any change from the status quo whereby Americans consume, while they produce and grow.
Telegraph: There’s very little appetite among the big surplus nations of Asia for the correction in imbalances the IMF thinks desirable, nor, despite international lip service to “sustainable and balanced growth”, is there any centralised mechanism for ensuring it comes about.
To the contrary, public policy across the globe to fight the recession conspires only to make the imbalances worse. Exceptional monetary, fiscal and financial system support in America and elsewhere may be necessary to prevent the world from falling into a second Great Depression, but the extreme excess of liquidity thereby created also sets the scene for fresh bubbles in consumption and asset prices in the advanced economies.
One of the most well used mantras doing the rounds at the annual meeting of the International Monetary Fund in Istanbul last weekend was that policy makers should be careful “not to waste a good crisis”. By this is meant that there is nothing like adversity to concentrate collective minds on necessary reforms and provide the will to drive them through.
But with the immediate crisis now over, that will is already waning. The big surplus countries have in any case never accepted the case for immediate and fundamantal change. Yet perhaps they do accept the inevitability of gradual change.
While dollar shorts probably have long-term trends in their favour, many will be made into unfortunate examples by aggressive central banks along the way. Traders beware.