Thursday, October 7, 2010

Is Currency Intervention Legal?

Even though countries fortunate enough not to resort to one often look down at countries that do in order to get out of a bind, is the act of currency intervention even legal?

By: Ringo Bones

So far there’s still no legal precedent of any country subjected to punitive UN Security Council sanctions whenever they resort to high-level currency intervention in order to get out of a current economic bind. The world’s leading economists recently criticized the wisdom and sustainability of the Bank of Japan’s latest attempt at currency intervention, primarily done in order to lower the value of their super-strong yen in order to make Japanese exports globally competitive again. To those still unfamiliar with currency intervention, it goes as follows.

Currency intervention is the action taken by of one or more governments, central banks, or currency speculators for the purpose of increasing or reducing the value of a particular currency against another currency. Most economists have a consensus view that currency intervention – more often than not – fizzle out quite quickly since the funds used to make a particular currency artificially low or high in value is ultimately limited in comparison to the level of international trade that floats it as its true arbiter of value.

The value of the yen recently became too strong for its own good because many speculators and some governments – like the Peoples Republic of China – has used it as a safe haven investment. The Bank of Japan’s funds being used to reduce the value of the yen back to just make Japanese export products competitive is ultimately limited in comparison to the war-chest of the various global currency speculators and the Beijing government; Making the Bank of Japan’s first currency intervention since March 2004 ultimately an exercise in economic futility.

The Mainland Chinese currency – the yuan – has a value ultimately determined by the country’s volume of trade with the international market, as do most floating currencies these days. While the US government - especially US Treasury Secretary Timothy Geithner - is still irked by the Beijing government’s “suspected” subsidizing of the yuan in order to keep its value artificially low in order to make China’s exports unfairly competitive.

As the US government is already in the process of legislating laws to charge punitive tariffs against Chinese goods imported into the US if Beijing doesn’t intervene to strengthen the value of the yuan. Even though this move reeks of protectionism, the legal gray area that currency intervention has carved itself a niche into is by no means free of moral hazards.

George Soros, the most famous billionaire who single-handedly performed his own successfully executed currency intervention back Black Wednesday of 1992 never spent a time in jail despite of famously known for “breaking the Bank of England”. With an estimated current net worth of around 11-billion US dollars, Soros is ranked by Forbes as the 29th richest person in the world - and probably the most notorious single-proprietorship currency speculator.

With such wealth and influence, Soros can for all intents and purposes practically make up his own “moral sensibilities” as he goes. In 1997, he managed to bring the economy of South-East Asia to its knees by performing his “one-man” currency speculation that triggered the Asian financial crisis of 1997 just because Soros is pissed when the Association of South-East Asian Nations or ASEAN welcomed Myanmar – and the country’s despotic regime - as a member.

So is currency intervention legal? I’m afraid so, but within the legal gray area of a niche that it has managed to carve itself into I just hope that central banks, currency speculators and eccentric billionaires that use it consider the moral hazards that inevitably and inextricably come with it. After all, an overwhelming majority of us still resort to crummy jobs just to earn money.


Sherry said...

The double-standard aspect of this issue is that why does US Treasury Secretary Timothy Geithner give the green light for Japan to intervene in the currency markets to lower the value of the yen but Mainland China is slapped with a currency manipulator label for doing the same thing?
Now oft-called "competitive devaluation", this sort of currency intervention - or is it currency manipulation? - primarily came into being as an unintended consequence of the carte blanche quantitative easing done by almost every central bank in the world in order to free themselves from the global credit crunch of 2008. World Bank President Robert Zoellick even warned us that the current currency row could derail our still on-going global economic recovery. Competitive devaluation - it seems - could become the norm with central banks of countries obsessed with export-led post global credit crunch economic recovery.

Ringo said...

The financial news has recently been dominated by both China and Japan intervening in the Forex markets in order to strengthen their exports and stimulate their economies by lowering the value of their currency. Sometimes I wonder if which economic issue - the Basel III capital requirements or currency intervention by both China and Japan - will be dominating the upcoming G-20 Summit in Seoul, South Korea.

Sherry said...

The October 8 to 10 2010 annual meeting of the International Monetary Fund and World Bank in Washington D.C. failed to diffuse the on-going currency wars. During the meeting, US Treasury Secretary Timothy Geithner seems to have a thinly veiled speech about Mainland China not doing enough to appreciate the value of the yuan in comparison to other currencies. Geithner says: "...the IMF must strengthen its surveillance of exchange-rate policies and reserve accumulation practices. We recognize that precautionary reserve accumulation is appropriate to a point and may well have helped several emerging market economies cope with the adverse effects of the recent global financial crisis. However, excess reserve accumulation on a global scale is leading to serious distortions in the international monetary and financial system, and is inhibiting the international adjustment process. We look forward to the IMF's upcoming discussion of reserve adequacy and urge the development of new reserve metrics. An upgrade of the analytical tools for evaluating reserve holdings is long overdue.

Ringo said...

In the post-IMF and World Bank meeting held in Washington D.C. back in October 8 to 10, 2010 the still unresolved currency conflict between Mainland China and the US might allow another "unconventional" weapon to be used in the current global currency wars - namely paying sovereign debts before their due to inadvertently strengthen the currency of your export competitors. Just imagine the US suddenly paying a significant amount of its debt to Mainland China, this would certainly skyrocket the value of the yuan. Luckily, the US is still trapped in a "mini-recession".
A sudden influx of funds really could cause a certain country's currency's value to skyrocket. Like Thailand's recent sudden influx of investment capital had made the Thai baht's value to suddenly appreciate.