The Yuan’s Libido and the Dollar’s Testosterone

As arranged, there had been talk in Washington about a week ago, during the International Monetary Fund (IMF) and G7 meetings, concerning the “currency war.” Each of the finance ministers or central bank governors who were present had his or her own commentary. French Minister of the Economy Christine Lagarde did too, but it was to distance herself from the general tone of the meetings, which was quite martial. “Feeding anticipations by using military terms does not seem to me to be the most constructive way to advance the subject.” Some of Mme. Lagarde’s enlightening monetary remarks have gained much more media attention:

In an interview given to Le Monde, the French minister estimated that firms “are showing less libido and testosterone” in politics as well as in business. Then, reiterating her point on American television station ABC: “It helps in the sense that we [women] don’t necessarily project our egos into cutting a deal, making our point across, convincing people, reducing them to — you know — a partner that has lost in the process.”

Which is not too nice for men, especially her male colleagues in the government, Ministers Sarkozy and Strauss-Kahn. But it’s rather just, notably in monetary matters, because right now the exchange market reeks of testosterone. You’d think it were the Tour de France or a regiment of paratroopers — one shows his muscles, flexes his pectorals, menaces, intimidates and motivates the troops before the assault.

The army staff looked at the different options of attack: The brilliant colonel Martin Wolf (of the Financial Times) and the seasoned general Fred Bergsten (of the Peterson Institute) published their plans to take over the yuan and make build up its power. The mysterious field marshal Zhou (Bank of China) promised a lightning-fast reply. As for the impetuous lieutenant Nicholas Sarkozy, he proposed to go and entirely deplete America’s nuclear arsenal by throwing out the use of the U.S. dollar as the world’s reserve currency. All this is certainly “male” and “virile,” to quote Luxembourg’s finance minister Jean-Claude Juncker, but it is also quite confused: shifting alliances, ill-defined goals, incoherent strategies and weapons of uncertain power. It leaves one wondering if all this monetary flexing of different directors is just a show masking their inability to act.

Three weeks ago marked the 25th anniversary of the Plaza Accord in New York, eliciting a bit of nostalgia for what marked the height of post-war international monetary cooperation. At the beginning of the 1980s, the Reagan administration announced that the United States would not interfere with the foreign exchange markets — an application of the free market principle, but one that could not survive the ordeal that was the spike in the dollar’s value in 1983 and 1984. On Sept. 22, 1985, the finance ministers and central bank governors of the G5 (United States, United Kingdom, France, Japan and Germany) seemed fine with intervening in order to devalue the dollar, which they did successfully. In hardly two years, the dollar lost almost half of its value, falling from 9 to 5 francs and from 260 to 150 yen.

In February 1987, the G5 judged that the dollar had fallen enough and, in Paris, at the Louvre, they proclaimed that the time of stabilizing exchange rates had come. And that was effective… for a few months, until the American Secretary of the Treasury, James Baker, denounced the Bundesbank’s policy, which was, according to Baker, contrary to the Louvre Accords. The politicized debate again devalued the dollar and provoked the October stock exchange crash known as “Black Monday.”

International monetary cooperation never really came back after that memorable clash. The number of concerted interventions of the large central banks since then can be counted on a single hand: in 1995 and 1998 on the yen, and in 2000 to revalue the euro — and nothing more for 10 years. The main reason: At the moment of the Plaza Accord, the currency market was still small. Daily transactions hardly reached $600 billion (425.4 million euros). The central banks still had the means to combat market forces and to punish speculators in order to keep them in check. Today the market is approaching $4 trillion a day. That is four times the stocks of the United States and the euro zone combined. With $129 billion, the American Federal Reserve (Fed) has less reserve currency at its disposal than Thailand. To bring it back to military vocabulary, the large central banks, if they were to initiate hostilities, would risk defeat. As the economist Kenneth Rogoff says, “most empirical studies find that it is the central banks that consistently lose money trying to tilt against windmills like Don Quixote.”

Above all, the Plaza Accords appear as an exception, if a happy one, to the history of the currency market. A unique moment when all the great industrialized countries had a common interest in a balances of exchange rates. And today? Everyone wants a weak currency — the Americans, the Chinese, the British, the Japanese, the Europeans and the emerging economies. This, by definition, renders things a bit complicated and monetary cooperation very improbable.

It is wrong to fear an imminent currency war. The war was declared a long time ago; it is the same habitual regime of the exchange market. Periods of peace serve as nothing but brief interludes. And it will be this way as long as we live in a system of floating exchange rates, with national currencies fluctuating with the rhythm and economic needs of their own countries. It will be this way as long as a single global currency with a global economic governing system does not exist; we can imagine it, but it won’t be around for a while. As long as there are men, Minister Lagarde would add…