The currency wars have become the current-account truce. G-20 finance ministers and central bankers meeting in South Korea last weekend took the high road on global imbalances in preference to the low road of competitive devaluations that leads nowhere good. Action point six of six mainly mom-and-Apple-Pie commitments listed in the communiqué issued after the meeting said the finance ministers would:
Strengthen multilateral cooperation to promote external sustainability and pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels. Persistently large imbalances, assessed against indicative guidelines to be agreed, would warrant an assessment of their nature and the root causes of impediments to adjustment as part of the Mutual Assessment Process, recognizing the need to take into account national or regional circumstances, including large commodity producers. To support our efforts toward meeting these commitments, we call on the [International Monetary Fund] to provide an assessment as part of the MAP on the progress toward external sustainability and the consistency of fiscal, monetary, financial sector, structural, exchange rate and other policies.
In other words, the U.S. will cut its deficits and China will increase domestic demand to reduce its surpluses allowing the yuan continue to appreciate against the dollar. Which is actually what needs to happen and both countries would like to happen, just not their part yet. By making the IMF the cop on this particular beat and not setting any specific targets for it to police to, it is a fair bet that none of this will happen anytime soon. G-20 leaders meeting next month in Seoul might change that, but we doubt it.
Meanwhile, the U.S. will be able to continue its dollar devaluation against currencies that move freely through a second round of quantitative easing (we expect the U.S. Federal Reserve to launch its QE2 next week) while China will let the yuan appreciate only gradually against the dollar and keep racking up its surpluses while it resolves its internal political differences over making the reforms necessary to make the economy more domestic-demand driven, a project that will require multiple five-year plans.
We never said the high road goes anywhere, at least for a long while.