10 countries that benefit from the falling dollar. Some of the arguments are spin (I’m skeptical that de-dollarising Afghanistan necessarily helps Afghans), but someone has to cheer for the correction of global imbalances.

10 countries that benefit from the falling dollar. Some of the arguments are spin (I’m skeptical that de-dollarising Afghanistan necessarily helps Afghans), but someone has to cheer for the correction of global imbalances.

Brad Setser says that a voluntary code of conduct for sovereign wealth funds looks like it has little chance.

Sovereign wealth funds are a hot topic. The US and IMF are stepping up the pressure at Davos for a voluntary code of conduct, and Philipp M. Hildebrand endorses a code as a means of staving off protectionism at Vox. Meanwhile, Dan Drezner is not as worried.

The FT on the dollar: adjustment or affliction?

But the growing evidence that the dollar’s decline will not be followed by a narrowing of global imbalances, merely a shifting of them around the world, gives cause for real concern.

Normally cool heads in central banks and international organisations are uttering notes of alarm. Mervyn King, governor of the Bank of England, warned last month, for example, that the big upward movements in other Group of Seven leading countries’ currencies against the dollar, while many oil states and China maintained a de facto dollar peg, were causing “great currency tensions”.

“I came away from the IMF meetings in Washington recently more concerned about the implications of these tensions precisely because the unwinding of the imbalances is not just a hypothetical prospect out there, but is happening now,” he said.

Wolfgang Munchau says Bretton Woods II is dead.

The FT‘s Samuel Brittan on whether international imbalances are a problem:

The morals I drew were, first, that the onus of proof was on those who regarded it as a problem, and second, that many of the advocated remedies could be worse than the disease….

Yet such is the perversity of humanity that governments could make the imbalances into a problem where none existed before. If the deficit countries are to reduce their deficits, they have to switch resources from home markets to exports or import saving activities. It would be lovely if this could be done painlessly without impinging on output and activity. But a substantial structural change of this kind does require some sort of domestic slowdown while resources are being switched.

The danger, in a nutshell, is that central banks and governments are so assiduous in promoting domestic growth that they will not tolerate a few quarters of lacklustre GDP performance. In that case, deficits will never be allowed to contract properly and will become a problem which they might not have been to start with. All I can suggest is that, in their regular interest rate decisions, they should err on the side of caution.

Dean Baker defends President Bush:

So who is to blame for the falling dollar in this story? The answer is simple: Robert Rubin and the people who let it become overvalued in the first place. The high dollar of the second Clinton administration produced beneficial short-term effects (at least for people who did not have to compete against imports), but had inevitable long-term costs. We are now experiencing these long-term costs in the form of the decline of the dollar, which will lead to higher inflation and quite likely higher interest rates.

In this particular case, President Bush and his tax cuts are innocent bystanders. If anything, the expected effect of his tax cuts should be to raise the value of the dollar because the resulting budget deficits lead to higher interest rates in the United States.

In short when looking for people to blame for the falling dollar, the spotlight should be focused on the people who gave us the high dollar. It was a story of short-term gain for long-term pain, just like the Bush tax cuts, except the impact of the overvalued dollar is considerably larger.

UPDATE: knzn defends Rubin, arguing that hot air (the ‘strong dollar’ mantra) doesn’t hold much sway in foreign exchange markets.

Brad DeLong brings good news:

As long as imbalances of world trade and capital flows unwind slowly and smoothly, the magnitude of any global economic distress should be relatively small… The prospect of a truly hard landing — one where global investors wake up one morning, suddenly realize the US current accounts cannot be sustained, dump dollars and crash the global economy — is becoming less likely with each passing day.

And warnings:

Under two scenarios — both concerning China — the unwinding of global imbalances could cause regional if not global depression… Today, the principal source of international economic disorder is made in China, owing to factions inside its government that hope to avoid a more rapid appreciation of the yuan’s value.

Via Thoma.