Mnuchin’s mis­sion

“Al­ter­na­tive facts” ap­par­ently served Trump well dur­ing his cam­paign. But, at the G7's meet­ing in Si­cily in May and at the G20's meet­ing in Ham­burg in July, they will only get him – and the US – into trou­ble.

Financial Nigeria Magazine - - Contents - By Jef­fery Frankel

US Trea­sury Sec­re­tary Steven Mnuchin is hemmed in on all sides. Do­mes­ti­cally, he's trapped be­tween the prom­ises he has made (such as the “Mnuchin rule” that taxes wouldn't be cut for the rich), the ac­tions of Pres­i­dent Don­ald Trump (whose tax plan in­cludes cuts for the rich), and sim­ple arith­metic (which makes the ad­min­is­tra­tion's con­flict­ing pledges im­pos­si­ble to ful­fill). But even on the in­ter­na­tional stage, where US trea­sury sec­re­taries typ­i­cally en­joy more lat­i­tude and es­teem, Mnuchin is likely to have a hard time.

Af­ter all, the Trump ad­min­is­tra­tion has made it clear that it does not in­tend to ful­fill the global lead­er­ship com­mit­ments that Mnuchin's pre­de­ces­sors have over­seen. Given Trump's be­lief that in­ter­na­tional ne­go­ti­a­tions are just a fo­rum for mak­ing uni­lat­eral de­mands, how could Mnuchin – who, like his boss, lacks gov­ern­ment ex­pe­ri­ence – per­suade other coun­tries that ad­her­ence to com­mon rules and norms, such as open trade, is in ev­ery­one's in­ter­est?

Trump's en­tire ad­min­is­tra­tion is surely ex­pected to ad­here to his “Amer­ica first” ap­proach. As a se­nior Trea­sury of­fi­cial re­cently de­clared, Mnuchin will be “push­ing hard” to en­sure that the G20 plays “a help­ful role in ad­vanc­ing US in­ter­ests.”

For­tu­nately, Mnuchin has so far avoided ful­fill­ing one of Trump's ir­ra­tional prom­ises: to la­bel China a cur­rency ma­nip­u­la­tor on his first day in

Mnuchin has re­quested from the In­ter­na­tional Mon­e­tary Fund a “frank and can­did anal­y­sis” of mem­ber coun­tries' ex­change-rate poli­cies, to de­ter­mine whether China is de­lib­er­ately keep­ing its cur­rency un­der­val­ued.

of­fice. The next op­por­tu­nity to take that step comes in April, when the bian­nual Trea­sury re­port to Congress is due. Mnuchin should let it pass.

Mnuchin has re­quested from the In­ter­na­tional Mon­e­tary Fund a “frank and can­did anal­y­sis” of mem­ber coun­tries' ex­change-rate poli­cies, to de­ter­mine whether China is de­lib­er­ately keep­ing its cur­rency un­der­val­ued. That's a good thing; such surveil­lance is the IMF's re­spon­si­bil­ity. But one hopes that Mnuchin rec­og­nizes what the an­swer will be.

China no longer qualifies as a cur­rency ma­nip­u­la­tor un­der any of the three in­ter­na­tion­ally ac­cepted cri­te­ria: ex­change rate, trade bal­ance, or for­eignex­change re­serves. The ren­minbi was un­der­val­ued in 2004. But it ap­pre­ci­ated 37% in the sub­se­quent decade. Af­ter China's trade sur­plus peaked at 9% of GDP in 2007, it ad­justed to the re­ced­ing price com­pet­i­tive­ness: it has been less than half that level each year since 2010.

In 2014, as the Chi­nese econ­omy slowed rel­a­tive to the US, cap­i­tal flows re­versed, send­ing China's over­all bal­ance of pay­ments into deficit. Re­serves peaked in July of that year, and have been fall­ing ever since.

Far from de­valu­ing the ren­minbi, the Peo­ple's Bank of China has spent $1 tril­lion of its re­serves over the last three years try­ing to sup­port it (by far the largest such in­ter­ven­tion in his­tory). The Chi­nese au­thor­i­ties have re­in­forced this ef­fort by tight­en­ing con­trols on cap­i­tal out­flows. Thanks to these mea­sures, the ren­minbi re­mains one of the world's more ap­pre­ci­ated cur­ren­cies.

None of this in­for­ma­tion is new. It is true that it took a while for most Amer­i­can com­men­ta­tors and politi­cians to no­tice the sea change in China's for­eign-ex­change mar­ket. But, three years af­ter it be­gan, most ob­servers have fig­ured it out. Now some­one needs to ex­plain it to Trump.

Mnuchin should be the one to do it – ide­ally, be­fore Trump's April 6-7 meet­ing with Chi­nese Pres­i­dent Xi Jin­ping. Trump has al­ready lost face with China, by chal­leng­ing, with his trade­mark blus­ter, the “One China” pol­icy, only to re­verse course meekly in a Fe­bru­ary 9 phone call with Xi. The US will not ben­e­fit from an­other awk­ward climb-down by its leader.

But China is not the only sup­posed cur­rency ma­nip­u­la­tor on the Trump ad­min­is­tra­tion's radar. Peter Navarro, direc­tor of Trump's new Na­tional Trade Coun­cil, has ac­cused Ger­many of ex­ploit­ing its trad­ing part­ners, with an “im­plicit Deutsche Mark” that is “grossly un­der­val­ued.” It is a uniquely fool­ish charge.

True, Ger­many's trade sur­plus is 8% of GDP, and its cur­rent-ac­count sur­plus is close to 9% of GDP, which is ex­ces­sive. But Ger­many has not had its own cur­rency since 1999. Any in­ter­ven­tion in cur­rency mar­kets would be car­ried out by the Euro­pean Cen­tral Bank, not the Bun­des­bank. And, as it hap­pens, the ECB has not in­ter­vened in the for­eignex­change mar­ket for many years. (When it did, it worked to sup­port, not de­value, the euro.)

Of course, a cen­tral bank can take steps to de­value its cur­rency in­di­rectly, by ex­pand­ing the money sup­ply. But cen­tral banks have ev­ery right to use mon­e­tary pol­icy to re­spond to do­mes­tic eco­nomic con­di­tions, and it may well re­quire a mind reader to know whether mon­e­tary stim­u­lus is aimed specif­i­cally at cur­rency de­val­u­a­tion. More­over, suc­cess­ful mon­e­tary stim­u­lus would raise in­come through do­mes­tic chan­nels, thereby boost­ing im­ports, so the net ef­fect on the trade bal­ance could go ei­ther way.

Given all of this, the ECB was en­tirely jus­ti­fied in re­spond­ing (be­lat­edly) to the 2008-2009 global re­ces­sion by low­er­ing in­ter­est rates and un­der­tak­ing quan­ti­ta­tive eas­ing, re­gard­less of those ef­forts' con­tri­bu­tion to a de­pre­ci­a­tion of the euro. And, in this case, no min­dread­ing is needed to de­ter­mine in­ten­tions: Ger­many op­posed the ECB's mon­e­tary stim­u­lus.

If Trump is won­der­ing why so many cur­ren­cies are weak­en­ing against the dol­lar, per­haps he should look at his own ac­tions over the last five months. He has threat­ened to im­pose tar­iffs against Mex­ico, China, and other trad­ing part­ners. He has talked of a bor­der ad­just­ment tax. And he has promised tax cuts that would im­ply a rapid ac­cu­mu­la­tion of na­tional debt, forc­ing up in­ter­est rates and thus the dol­lar's value.

“Al­ter­na­tive facts” ap­par­ently served Trump well dur­ing his cam­paign. But, at the G7's meet­ing in Si­cily in May and at the G20's meet­ing in Ham­burg in July, they will only get him – and the US – into trou­ble. Mnuchin's un­en­vi­able task is to ac­quaint Trump with re­al­ity.

US Pres­i­dent Don­ald Trump and Trea­sury Sec­re­tary Steven Mnuchin

Chi­nese Yuan and US dol­lar

Newspapers in English

Newspapers from Nigeria

© PressReader. All rights reserved.