During World War II, we sang that there would be blue birds over the white cliffs of Dover along with all sorts of other splendid things, “tomorrow, when the world is free …”
However, especially in the last 20 or 30 years, we have discovered that freedom can often have strange outcomes, especially in such affairs as free markets, free trade and the free flow of globalised capital.
Of course, for even longer than that, there have been some strange features of freedom. When we look like having a record number of jobs and a record number of our people in them, then our central banks raise interest rates to make sure we put a stop to that. When wages rise after stagnating for years, our central banks race, sometimes almost in panic, to stop that too.
We’re used to all that; but the more freedom we get and the longer we get it, the stranger some of its features become.
For example, we recently had a meeting of the Finance Ministers of the Group of Seven in Germany. These are - economically and financially speaking - just about the most important people you get, and usually they take their central bankers along with them.
At this recent meeting, they were faced with a situation of global imbalances of trade and payments - of credit and debt - that were unprecedented.
China’s currency reserves are approaching a trillion US dollars and have been increasing at an accelerating rate of around US$200 billion a year. Japan’s current payments surplus is not quite so high and increasing at a lesser rate but still both Japanese figures would be historically unprecedented if it were not for the even more extraordinary Chinese situation.
Financial analyst Gary Dorsch has written:
Since the BOJ (Bank of Japan) dropped its overnight loan rate to zero per cent in March 2001, the Euro has advanced from around 105 yen to as high as 158.70 yen today. Aided by the Euro's strength against the yen, Japanese exports to the European Union nearly doubled to 1.06-trillion yen in December . But on the flip side, European exports to Japan have waffled between stagnation and deterioration. Last year, Japan racked up an 18.6 trillion yen ($160 billion) current account surplus, while the Euro zone suffered a 16.8 billion Euro ($21.5billion) deficit. Yet the power of the “yen carry” trade was able to swim against the tide of these trade imbalances, by pushing the Euro 12 per cent higher against the yen last year.
Characteristically, in the past, this situation would have meant a powerful surge in the value of both the renminbi and the yen; but, strangely, this did not happen and was not about to happen. True, the renminbi continued on its gentle course upwards in relation to the US dollar, a course on which the Chinese authorities set it a year or so ago. If there was any acceleration of this course, it was scarcely perceptible; and, as for the yen, not only did it not strengthen but it became noticeably weaker in terms of the United States dollar. That was at a time when the overall gap in the American balance of trade for 2006 was announced to be running close to $US800 billion a year.
However, as Alice might have said, things got curiouser and curiouser.
The Chinese authorities, who were, after all, nudging the value of the renminbi upwards, were put under pressure by the Finance Ministers of the Seven to nudge their currency upwards much more dramatically, while the Japanese, who were doing as close as it gets to nothing at all to revalue the yen, were left in peace.
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