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Floating Regime: Myth or Reality?

As you might be aware, The Swiss National Bank decided yesterday 06/09/2011 to peg the Swiss franc against the Euro (CHF 1.20 per Euro) in an attempt to weaken its currency and protect its economy. The SNB has also pledged to buy foreign currencies to force down the value of the Swiss franc and has warned that it would no longer allow 1 CHF to be worth more than € 0.83.

For me, this implies a high level of intervention into markets and thus raises a lot of questions: with American, China, and now Switzerland setting fixed values for their currencies by strictly monitoring it, are we still within the floating regime where market forces were supposed to determine currency values? We know that even in normal circumstances, Central Bank normally intervenes to stabilise its currency; but to this extent? Having a goal of a fixed rate set by a central bank?  Are we about to witness a currency war as Japan also recently revealed their plan of selling the yen and pledge to inject liquidity? Should we therefore rename the “floating regime” to a “managed float regime”?

To be continued …

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September 7, 2011 Posted by | Articles In English, Economics, International Economics, International Finance | , , , , , , , , , , , , | Leave a comment

Rencontre Chine – Etats-Unis: Monnaie Et Politique De Change Au Cœur Des Discussions

Ce matin donc commençait la visite officielle du président chinois Hu Jintao aux Etats-Unis où il a été reçu dans la journée par son homologue américain Barack Obama.

Comme de coutume, dans ce genre de rencontre, la conférence de presse est de mise avec ses courtoisies, le respect mutuel, des compliments partagés etc etc… Pourtant en toile de fond on dirait deux experts de la Finance Internationale : l’un prônant un système de change totalement décidé par les forces du marché et donc totalement flottant, Barack Obama pour ne las le citer ; et l’autre bien qu’implicitement, défendant un change relativement contrôlé avec une marge de fluctuation très étroite.

Alors pour mieux comprendre les enjeux sous-tendant les positions de l’un comme de l’autre, je me suis prêté au jeu « avantages & inconvénients » de chacun des systèmes.

Si les avantages d’un système de change flottant – correction automatique, moins de problèmes de liquidités internationales et de réserves, commerce international mieux équilibré, protection automatique vis-à-vis des chocs externes- font quasiment l’unanimité de nos jours ; les avantages attribués à un système de change fixe ou contrôlé ne seraient pas aussi nocifs à l’économie à en croire Hu Jintao.

Tout d’abord la politique chinoise de change…

Depuis le 1er Janvier 1994, le Yuan chinois est ancré au Dollar américain sur la base d’une parité fixée à 8,277 yuan pour un dollar avec une marge de fluctuation très étroite (+/- 0,3%). Depuis 1994, la monnaie est convertible mais pas pleinement et les mesures de contrôle des changes sont extrêmement strictes avec pour objectif principal le maintien de la stabilité monétaire permettant de garantir une croissance élevée et une « prospérité sociale ». Entre autre mesures, la banque centrale chinoise est dans l’obligation d’acheter ou de vendre du dollar – fonction de la situation – pour maintenir la parité fixe yuan/dollar. Et bien sûr la maintenir à un niveau sous évalué.

Aussi, la chine par des lois taillées sur mesure, non seulement n’autorise pas les résidents étrangers, en particuliers les traders et banques américaines à investir des capitaux en chine, mais en plus rend l’action de ces derniers pratiquement  impossible sur les marchés des changes et de capitaux chinois. Car si ceux-ci parvenaient à placer librement leur dollars désormais bon marché (dollar américain) en chine comme ils le font au Brésil ou en Inde afin de percevoir des rémunérations relativement élevées que celles qu’ils percevraient en plaçant ces fonds aux Etats-Unis ; ceci aurait pour effet  à termes d’accroitre la demande du yuan chinois et si soumis à la loi de l’offre et de la demande, d’accroitre sa valeur.

Mais pour défendre ces mesures, Hu Jintao vous dira par exemple, qu’en maintenant son change sous-évalué et à parité quasiment fixe avec le dollar, entre autre bénéfices au delà des exportations bon marché, la chine offre pour les entreprises étrangères un cadre plus certain aux affaires. En effet, lorsque les taux de change sont moins volatiles, le commerce est beaucoup moins risqué dans la mesure où les profits, une fois rapatriés, ne sont pas altérés par les variations. Ceci justifierait donc entre autre raisons, la préférence chinoise de plusieurs multinationales occidentales lorsqu’il faut relocaliser (‘offshoring’). Et pour le président Obama, comme pour d’autres décideurs de par le monde, ceci serait une forme de concurrence déloyale.

Un autre bénéfice de ces mesures serait que le yuan chinois fait moins l’objet de spéculations car les potentiels spéculateurs ne prévoient pas de variations significatives de la monnaie. Et du coup, parce que moins exposé, moins attaqué et donc plus stable, le yuan pourrait commencer à bénéficier de la confiance des traders et institutions financières. Ceci causerait de fait quelques petits soucis au dollar américain et aux autorités américaines qui depuis la fin de la Seconde Guerre Mondiale savourent bien les avantages que leur confère le status de monnaie de réserve internationale… [Je vais peut être un peu trop vite en besogne….mais bon !].

Donc, en plus de la compétitivité affichée que lui apportent la stabilité et la sous-évaluation de son change, la chine aurait bien d’autres raisons inavouées…

Et pourquoi d’autres Economies ne suivent-elles pas les méthodes chinoises ?

Si tout le monde venait à agir comme la Chine, les premières Economies à subir seraient probablement les grandes Economies elles mêmes (Eurozone, USA, GB …) et ensuite les pays très pauvres. Comment ? En ceci que pour soutenir une croissance mondiale, il faut qu’elle soit accompagnée par un niveau de liquidités internationales approprié (Euro, Dollars, Livres sterling, etc.). Alors si les pays émetteurs de ces devises internationales venaient soit à restreinte/ soit à trop émettre celles ci afin de satisfaire leurs besoins de compétitivité, cela conduirait indiscutablement soit à un ralentissement de l’activité économique mondiale dans son ensemble, soit à une inflation au niveau mondial.

Deuxièmement, si la politique compétitive chinoise était adoptée par tout le monde, cela conduirait inévitablement à des mesures protectionnistes du « chacun pour soi »  ce qui à son tour engendrait des crises généralisées, une limitation de la croissance mondiale et au pire à une récession mondiale.

Mais la chine pourra-t-elle indéfiniment poursuivre cette politique du contrôle de change ? Quels risques coure-t-elle ?

Je commencerais par le risque de l’incapacité de répondre aux chocs. En effet, avec un régime de change fixe, lorsque les prix et le taux de salaire sont rigides, les marges de manœuvres permettant de faire face à des crises soudaines de la balance des paiements – comme celles causées par une augmentation brutale des prix du pétrole, sont très étroites. Hu Jintao me répondra surement que pour le moment, la china à un excédent commercial avoisinant les 11% du PIB…no comment.

Mais à très long terme, cette politique du contrôle du taux de change pourrait entrer en conflit avec les intérêts du monde des affaires et même ceux de l’économie nationale : la chine dépendant en majorité de ses exportations, elle pourrait voir à la faveur d’un choc externe (par exemple, une récession dans les pays importateurs, donc une baisse de la demande des produits chinois, ou du simple fait du durcissement de la concurrence étrangère) apparaitre une détérioration de sa balance des paiements. Le taux de change étant fixe, le pays perd de fait sa compétitivité…

A mon avis, si la Chine souhaite un jour jouer un rôle plus important dans la sphère financière internationale, elle devrait pour cela peut être, commencer par revoir l’ancrage du Yuan au dollar avec une nouvelle valeur de parité, élargir les marges de fluctuation du yuan vis-à-vis du dollar (+/- 5 à 7% par ex.) et à termes laisser fluctuer le yuan au gré des forces du marché. Ce d’autant plus que selon les experts, le yuan serait sous évalué de 15-25% à 60-70%. Et peut être aussi, la chine devrait commencer à penser à l’ancrage du yuan à un panier de devises plus large (dollar, euro, yen par ex.).

Il faut tout de même avant de conclure, noter que d’autres grandes puissances y compris les Etats-Unis interviennent quoique qu’indirectement, sur les marchés des changes afin de positionner leur monnaie en harmonie avec les objectifs de politique économique nationale.

A lire aussi :

Towards a new global reserve currency…the end of the U.S. dollar?

January 19, 2011 Posted by | Articles In French, International Economics, International Finance | , , , , , , , , , , , , , , , , | 2 Comments

GOLD STANDARD: YES OR NO?

Well, before answering this question, let me start by confessing something. This question has been on my mind for a while now; and to be honest, for me, there has never been a second of doubt with regards to the answer to this. Thus, there was no need for a debate or an article about the question. But, considering the number of papers and commentaries from economists, businesses, politicians and civil society organisations, calling for or rejecting the idea of a return to a Gold Standard system, I felt the need to write something.

Should we start with some fundamentals? Okay.

The Gold Standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. Under this system, paper notes are convertible into pre-set fixed quantities of gold; any issuance/creation of money is counterbalanced and guaranteed by gold reserves. Parity between two different currencies is therefore set through gold and the exchange rates are stable if not fixed between them.

This definition leads immediately to some questions:

First of all, who would decide on the weight of gold that would be allocated to currencies? Would the weight depend upon the current monetary strength of each country’s economy? What would determine the monetary strength or simply the strength of an economy? Would it be its ability to repay debts, its growth rate or the trust placed in its currency by international investors? Would the current quantity of a currency including treasury bonds (issued to pay debts) count towards determining the strength of an economy? Would all currencies be convertible into gold? If no, which currencies would be convertible and based on what criteria? If under the Gold Exchange Standard started in1922, only the U.S. Dollar and the British Pound were convertible into gold and other currencies were pegged to them, could this be the case today with new currencies such as the Euro and emerging economies such as China?

If there are so many questions raised with a potential Gold Standard system, why are some “famous” people calling for its return?

I must acknowledge that there are some advantages with such a system taking place. For instance, the Gold Standard would limit the power of governments in issuing fiat currency through central banks without counterpart in the real economy (quantitative easing, anyone?). The ultimate effect of financing debt through bond issues is to destabilise other economies who buy debt without gold collateral.

The Gold Standard also tends to reduce uncertainty in international trade by providing a fixed pattern of international exchange rates. Indeed, under a Gold Standard, disturbances in price levels in one country would be partly or wholly offset by an automatic balance-of-payment adjustment mechanism called the “price specie flow mechanism.”

Let’s take the example of a country with a negative balance of trade. Gold would flow out of that country in the amount that the value of imports exceeds the value of exports. This would mean reduction in the money supply in that country since the creation of money would be indexed to the quantity of gold held by the central bank. This fall in money supply would in turn, generate the drop in prices of products in that country. The lower prices would cause exports to increase and imports to decrease, which will improve the balance of trade. Inversely in countries with positive balance of trade.

Having said that, the idea of going back to the Gold Standard does sound really rustic to me owing to the high speed and complexity of today’s monetary and financial transactions around the world. Under such a system based on pre-determined, fixed exchange rates between currencies, there would be a need to review these fixed parities between gold and currencies every time that there would be a significant fluctuation on commodity, stock, financial or monetary markets. Furthermore, if a country decided unilaterally to devalue its currency, it would produce sharper changes on a global scale than the smooth declines seen in fiat currencies since the exchange rates are fixed. How? As its currency would become cheaper to obtain with less gold, economic agents would rather acquire it and later exchange it at the same exchange rate for a more powerful currency.

Also, in such a system where coins, paper notes, electronic funds and any other form of money are automatically convertible into pre-set fixed quantities of gold, what would happen if a country like China calls in all their debts including treasury bonds owed by western countries to be repaid immediately in gold?  With the vast quantity of dollars worldwide laying claims to the U.S. Treasury, an overnight transition to gold convertibility would certainly create a major discontinuity for the U.S. financial system.

People might respond that there is no need for the whole block of current dollar obligations to become an immediate claim. Well, no comment!!!

What about the bilateral debt owed by developing countries to developed nations? Would this be claimed in gold?

Finally, the idea of a Gold Standard could be suicidal for emerging economies. You would probably ask why?

Let’s have a look.

Indisputably, emerging or developing economies need to spend in order to finance their growth and their development. Most economists would also agree that when a country creates a budget deficit designed for public investment (infrastructure, education, basic research or public health), such a deficit is bearable, beneficial and even necessary in the case of emerging economies. Therefore, restricting these economies to spend in proportion to the quantity of gold produced would be anything but understandable. Indeed, budget deficit can help emerging nations to stimulate their economies by creating a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. As a consequence, the real GDP of the country raises and the unemployment rate decreases, leading to more tax income for the government.

The restrictions of gold convertibility could therefore profoundly jeopardise the development of some emerging economies.

I can hear some Gold Standard advocate voices responding that, they are not referring to the previous or old “Gold Standard”. Instead, they are referring to a new “fractional reserve system”, under which the gold reserve will indirectly affect the amount of currency circulated in countries and around the world.
Well, during economic crises like the current one, the “fractional reserve system” could meet the currency supply in countries such as U.S.A and E.U., and would not hinder the development of their economy. However, for emerging economies, the lack of gold reserve would not meet the monetary supply of rapid economic development.
But above all, being under a more traditional Gold Standard or a so called new modern one, developing countries, particularly those without enough gold, would have to purchase gold with their foreign exchange reserves. In that way, U.S. and Euro-zone could decide to withdraw dollars and Euros in order to protect their leading positions in international financial system.

To conclude this paper, and for those who have not yet noticed it, to the question on “Gold Standard: yes or no?” my answer is without doubt no. However, I must admit that the current global financial system, which predominately relies on the U.S. Dollar as a reserve currency by which major transactions such as the price of gold itself are measured, must change. Especially as U.S.A do not issue their currency with proper real economic counterpart.

But instead of going back to a strict Gold Standard system, the idea of having a more diversified reserve currency system based on market baskets of currencies or commodities including gold would be more sensible.

Related Article:

Towards a new global reserve currency…the end of the U.S. dollar?

January 2, 2010 Posted by | Articles In English, Economics, International Economics | , , , , , , , | 10 Comments

OUI OU NON A L’ETALON-OR?

Veuillez vous référer à la version anglaise pour le moment.

https://lambertmbela.wordpress.com/2010/01/02/gold-standard-yes-or-no/

 

January 2, 2010 Posted by | Articles In French, Economics, International Economics | , , , , , | Leave a comment

Towards a new global reserve currency…the end of the U.S. dollar?

Dollar2

Maybe we should start with a quick reminder about the meaning of “a reserve currency”. Well, a reserve currency could be defined as a foreign currency held by central banks and other major financial institutions as a means to pay off international debt obligations, commodities such as gold or oil, or just to influence their domestic exchange rate.

Considering this definition, there are many questions that rise automatically: do we really need a reserve currency? Why the US dollar and not another currency? Could any other currency replace the US dollar?

Do we really need a reserve currency? What is the point of having one?

What’s the point of having a reserve currency? From its meaning, it serves first of all as a standard unit for international payments and thus it protects national currencies against shock. But more importantly, manipulating reserve levels can enable a country’s central bank to intervene against currency volatility  and thus help to adjust exchange rate. If demand for the  yen drops,  for example,  Japan can use their extra US dollars to buy up the unwanted yen, thereby propping up its value.

Why the US dollar and not another currency?

The first currency to be held in foreign reserves was the British pound, during the 18th and 19th centuries. That changed after World War II, when the major economic powers met at Breton Woods and established the exchange-rate system and the International Monetary Fund to oversee it. Under that system, the US dollar became the “de facto reserve currency”, partly because the United States was an economic power and partly because the dollar was backed by gold (In other words, any country could trade its dollars back in exchange for gold). As a result, the US dollar was considered extremely stable. Nowadays, the dollar still makes up more than 50% of global reserves, trailed by the euro, which constitutes about 25%.

Does any privilege accrue from being the reserve currency? Certainly. Part of the privilege is that the US can borrow in its own currency and later pay back the debt in its own currency even when the dollar has decreased in value. Furthermore, commodities and international invoices are priced in the reserve currency (US dollar),  so for the US economy there is no additional cost in the event of currency fluctuations.

So, if there is a need for a reserve currency, and if the US dollar is the most stable currency at the moment, why are China and Russia calling for a new global currency?

It was reported recently that two of the world’s superpowers, Russia and China , have called for a new global currency. I believe they’re doing this because they know that the US is printing (or planning to print) huge amounts of dollars right now to pay down its own massive debts (debts that other countries, like China, have been financing for years by purchasing US Treasury Bonds).

But, what America tends to forget is that: “the more paper money you print, the less it’s worth” and right now, with the Americans’ new stimulus plan, the federal reserve is planning to print many more paper money. (Don’t forget this is the country of “yes we can”).

So, how does it work?

You see, when a country buys a bond, in fact, it is loaning money and charging interest to the issuer of that bond to be paid upon maturity.

Well, for years now, other countries have been buying US bonds so the USA could in turn buy all of their made-overseas stuff. They were essentially loaning their biggest customer the money it needed to buy from them. For instance, US owes China alone over a trillion dollars. That’s just one of many countries that the United Stated owes money to.

So now, to get America ’s bills paid, The Federal Reserve is purchasing those US Treasury bonds that other countries used to buy. To do that, a lot more dollars have to be printed to buy them.

So, the fact that china is asking for a new reserve currency is a clear sign that China , as the largest holder of US dollar financial assets (bonds), is concerned about the potential inflationary risk of the US Federal Reserve printing money. Indeed, US dollars could decrease in value very soon, because The US Federal Reserve would print many of them to loan out. Logically, “the more there is of something, including money, the less it’s worth”.

What is the Chinese argument with regards to the new reserve currency system? Well, according to China , to better insulate countries from the ills of one country or one currency, they are pressing the IMF to create a “reserve currency” based on shares in the body held by its 185 member nations, known as special drawing rights (SDRs). The thing is, at present, the currencies in the SDR basket are by weight, the US dollar (44%), the Euro (34%), the Japanese Yen (11%) and the British Pound (11%). So ultimately, this new reserve system would not make that much difference except that, in addition to the US dollar, China would have the chance to diversify the basket of their reserves, keeping the US dollar at the top (just like now). Their argument nevertheless does make sense.

Could any other currency or reserve currency system replace the US dollar?

Not so sure. Why? Because first of all there is always an advantage to an individual central bank  holding its reserves in the same currency as other central banks. By far, the US dollar remains the main portion of central banks’ reserves around the world including China (approximately, the US dollar would make up more than 50% of global reserves, trailed by the Euro). Thus central banks  find it attractive to hold US dollars because other central banks hold US dollars. With everyone doing likewise, the market in dollars is deep, liquid and likely to last for long time ahead. Secondly, oil and many commodities are priced in dollars. Business deals around the world are done in dollars. Also, the US dollar is still considered by most investors as the more stable currency  compared to others such as the Euro or the Yen. Finally, it would require acceptance from nations around the world that have long used the US dollar and hold huge stockpiles of the US currency, before shifting over to any other reserve system. Can this happen suddenly?

Let’s finish this paper by pointing out that the idea of creating a new global reserve currency isn’t new. For decades there has been talk about creating an international reserve currency and it has never really progressed. Why? Because managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses and deficits.  Probably, in the end, the most powerful currency will predominate. This would be the US dollar again considering its stability and availability around the world.

Anyway, countries aren’t required to keep their reserves in dollars, they do it because they want to (The dollar’s “primary reserve currency” status is more de facto than official.) So, if China decided to dump its reserve of dollars, it would not only jeopardize its relationship with the United States , but other countries wouldn’t necessarily do the same.

So, Dear China, would you like to take the risk?

Related Article:

GOLD STANDARD: YES OR NO?

April 9, 2009 Posted by | Articles In English, International Economics, International Finance | , , , , , | 20 Comments