Jim Devine wrote: > last time I checked, the EE exchange > rate was depreciating...
We have been looking at different numbers then. My figures show that China's RMB, Russia's rouble, India's rupee, Brazilian real, etc. -- i.e. the currencies of the main countries listed by the Economist -- have been *appreciating* against the USD in the last few years. But even if we ignore *that*, there's no contradiction in the gist of the article. There are two issues that the Economist article didn't care to disentangle, but that are obvious. One issue is the expansion of *local currency* supply, which translates into domestic inflation and, thereby, depreciation of the currency vis-a-vis the USD. That's not really relevant here, since we're comparing various countries with different political configurations and, therefore, diverging local-inflation patterns. The second -- and really relevant -- issue is what happens to money creation by each of these countries once you control for local inflation. You don't have to use PPP. You can use any theory you deem appropriate. Still, the fact is that largely -- as dd suggested in a recent post -- these countries have sterilized forex injections by holding them as reserves, keeping them in the USD economy (U.S. or Eurodollar markets). Imagine the local inflation rates if they hadn't sterilize export revenues or capital inflows. If, as a mental exercise, with the boom in these economies in the backdrop (way ahead of the U.S. output growth rate), you think in terms of *relative* PPP (or any alternative theory of your preference linking the growth rates of prices with the growth rates of exchange rates, rather than the price index with the exchange rate), then you can see Mexico's peso, South Africa's rand, or Venezuela's bolivar's holding their ground vis-a-vis the USD in the last few years as a de-facto appreciation of those currencies, once idiosyncratic influences are tossed out. For some reason (or combination of reasons), the countries in the Economist's list have accumulated large forex reserves. A while ago I wrote about Stiglitz's theory of why this was the case: post-Jamaica agreement forex uncertainty facing central banks. I think Stiglitz is right, at least partially. Again, these forex injections are deliberately sterilized as far as those domestic economies are concerned. Still, their effects have to show in the U.S. and Eurodollar markets (the USD economy). I'll add that this may wind up translating into a different outcome of the crisis -- whenever it may hit. The late 1970s caught Latin America with huge floating-rate liabilities as commodity prices were declining and the Fed was turning deflationary under Volcker. That devastated the region. I'd have to look carefully at the numbers, but I suspect that reserves and all Latin America, Russia, and India are nowadays net creditors of the USD economy (U.S. economy plus Eurodollar markets). No doubt China and the Gulf countries are. Will that protect the value of that money if kept in USD? Well, for sure those countries will do much better with the reserves than without them. But the outcome will depend on whether Fed and Treasury end up defending the sacred rights of capital -- as opposed to the interests of U.S. imperialism. And that's a political fight that will continue to take very interesting forms. We shouldn't underestimate the role of xenophobia in the U.S. political system. Since I'm at this, one way to read Larry Summers' recent argument in the FT that China's central bank shouldn't be viewed as a regular return-maximizing capitalist (and there's a large germ of truth to this, of course, whatever our judgment about the "class character" of the CP of China might be) is as prepping for an inflationary onslaught to rob China and other holders of USD-denominated paper. Or, at least, some U.S. readers of the FT (rich, conservative, xenophobic) will use this rationalization to accept inflation, at least in the short run. Large sums of money held by entities somehow accountable to crowds rather than to individuals, not into maximizing returns in the short run but deployed to advance strategic interests of other sort, are necessarily suspect. Let me say in passing that, for workers here and abroad, the first-order of business is to fight U.S. imperialism. Objectively, in the short run, that helps international capital. Bizarrely enough, in spite of the fact that the bulk of international capital (including physical assets) is held by U.S. individuals, the interests of international capital *as such* in the current context appear *first and foremost* as the interests of *the governments* of China, Russia, Iran, Venezuela! -- as well as others that the mainstream ideological machines in the English-speaking countries from academia to media tend to view as rogues. The punchline of the Economist's article stands: the laws of economic gravity don't necessarily overcome opposing frictional forces at each point in time. Still, that doesn't stop gravity from persistently asserting itself.
