BY: John Mason
The problems being faced by Argentina and the Argentine peso have raised concerns about the dominance the U.S. dollar maintains in global financial markets. The United States dollar is, without question, the dominant currency in the world today.
However, Chelsey Delaney and Joshua Zumbrun write in the Wall Street Journal, “investors worry that the global economy has become too closely tied to the U.S. economy and its currency.”
“Roughly 40 percent of all global trade is invoiced in dollars…and many countries have borrowed heavily in the currency in recent years. Central banks held about 63 percent of their reserves in dollars at the end of last year, “ although, according to the International Monetary Fund, this is “the lowest level in four years….”
The current Argentina crisis has come about due to an increase in the value of the U.S. dollar that has resulted in a substantial decline in the Argentine stock market as well as a movement of monies out of the peso.
As a consequence of this disturbance, concern has been raised, once again about the role of the dollar in the world financial system.
Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO, and well-known expert on bond markets, has written a piece for Project Syndicate which argues that although “the US dollar’s appreciation (is) consistent with a longer-term rebalancing of the global economy, ”the sharp and sudden dollar appreciation risks unbalancing things elsewhere.”
In other words, the attempts by the Federal Reserve System to return United States interest rates and the Federal Reserve’s balance sheet to “more normal” levels, may be the best thing going for the United States, but they can have substantial negative impacts elsewhere.
More “normality” in the United States may mean a rising value of the dollar and a growing distress for Argentina…and other emerging markets.
Mr. El-Erian argues “policymakers should be implementing measures that take pressure off foreign-exchange markets. This includes, first and foremost, pro-growth policies, particularly for Europe, which, despite recent economic gains, faces significant structural headwinds. Emerging economies, meanwhile, should focus on maintaining solid balance sheets, improving their understanding of market dynamics, and safeguarding policy credibility.
“Country-level measures should be reinforced by better global policy coordination, especially to help avoid or break vicious cycles.”
The problem is that this approach does not really deal with the reasons why these emerging market nations, with Argentina taking the lead, are in the position they now find themselves.
Mr. El-Erian scans this issue gently, but it is a reality that must be taken into consideration as the world moves forward.
In this respect, Mary Anastasia O’Grady, writing in the Wall Street Journal takes a much harder line. Argentina’s current position is more Argentina’s fault than it is the fault of the United States.
Ms. O’Grady writes “A sharp sell off of the Argentine peso is sparking new inflation fears in South America’s second-largest economy. For a country that is heavily dependent on foreign capital and has a history of repeatedly destroying its currency, this is no passing storm.”
The current president of Argentina, Mauricio Macri inherited the fiscal mess he is now dealing with. His predecessors, Christina Kirchner (2007-15) and her husband, Néstor (2003-07) produced the environment that Mr. Macri has had to deal with.
In particular, Christina Kirchner took advantage of the flood of U.S. dollars that spread out into the world after 2008 as the United States attempted to not only recover from it’s Great Recession, but to provide sufficient dollars and dollar liquidity to the world to keep the economic and financial distress from taking over the world.
Ben Bernanke, former Chairman of the Board of Governors of the Federal Reserve System had particularly been concerned with supplying the world with US dollars and dollar liquidity in order to keep the financial crisis and recession from spreading throughout the world.
This meant that ample US dollars were available to people like Christine Kirchner…and others in a similar position…to take advantage of foreign capital to finance their “populist” programs of with more and more debt and more and more dependence on world markets.
But, this was a out-of-equilibrium situation that could not last. The only reason such a situation was sustained was due to Federal Reserve activity that did not cause interest rates to rise causing the value of the dollar to rise, and put Argentina and other countries at risk.
Mr. Macri inherited this disequilibrium when he took office in 2015 and attempted to correct the situation by tightening up fiscal affairs, restructure the government and bring prices under control.
Mr. Macri’s problem, according to Ms. O’Grady, was to “opt for gradualism, “which is,” she writes, “a code word for soft-pedaling the sad facts. More than two years into a four-year term, he hasn’t made a dent in aggregate government spending, and, as important, tax, labor and trade policy remain to restrictive.”
But, Mr. Macri did not want to cause too much unrest that might result in a re-election of another populist government that would put an end to all his efforts. The conclusion one can draw from this is, you can’t have it both ways.
The inflation in Argentina last year was 25 percent. For 2018, the central bank had set a goal of 10 percent but in December of last year raised the target to 15 percent. The future is not a rosy one.
But, the bottom line is, there is always pain connected with an out-of-equilibrium situation. Mr. El-Erian makes it all sound so easy: “Emerging markets should focus on maintaining solid balance sheets, improving their understanding of market dynamics, and safeguarding policy credibility.”
And, meanwhile, the United States seems to be out ahead of everyone else in terms of its return to a “more normal” economy. It doesn’t seem quite fair that it should pay the price for the adjustments that everyone else has to make.
Yet the United States has the dominant currency in the world. When the value of the US currency changes, other nations reap the consequences. Maybe the United States has more responsibility for Argentina’s current situation than it would like to accept because it produced a monetary policy that was too slow to tighten and this allowed other countries with their populist governments, like Argentina, to play the system. And, now we all have to deal with the consequences.
The Federal Reserve is not the central bank of the world… but, in many respects, it is the central bank of the world.