Rogoff: It's No Time for Oil Currency Hypocrisy from the US
Why is the U.S. sending inconsistent messages on exchange rate pegs?:
It's no time for oil currency hypocrisy from the US, by Kenneth Rogoff, Project Syndicate: Does it make sense for US Treasury Secretary Hank Paulson to be touring the Middle East supporting the region's hard dollar exchange-rate pegs, while the Bush administration simultaneously blasts Asian countries for not letting their currencies appreciate faster against the dollar? Unfortunately, this blatant inconsistency stems from the United States' continuing economic and financial vulnerability rather than reflecting any compelling economic logic. Instead of promoting dollar pegs, as Paulson is, the US should be supporting the International Monetary Fund's behind-the-scenes efforts to promote de-linking of oil currencies and the dollar.
Perhaps the Bush administration worries that if oil countries abandoned the dollar standard, today's dollar weakness would turn into a rout. But the US should be far more worried about promoting faster adjustment of its still-gaping trade deficit, which in many ways lies at the root of the recent sub-prime mortgage crisis. The administration's multi-pronged effort to postpone pain to US consumers, including super easy monetary and fiscal policy, only risks a greater crisis in the not-too-distant future. It is not at all hard to imagine the whole strategy boomeranging in early 2009, soon after the next US president takes office. ...
More importantly, it is imperative for US policies to be consistent across regions. How can the US Treasury, on the one hand, periodically flirt with labeling China a "currency manipulator" and, on the other hand, condone a similar strategy in oil-exporting countries? ...
What about ... the oil countries...? Are they right to fear potentially catastrophic results from abandoning the dollar?
As with China, these concerns are overblown. Even with the prevalence of dollar indexation across the region, exchange-rate appreciation would still help promote cheaper imports and higher living standards. ...
More immediately, inflation across the oil states is soaring today, with CPI inflation in the Middle East averaging more than 6 percent after years of relative stability. If this inflation is allowed to continue and deepen, it is likely to have effects easily as pernicious as the exchange-rate appreciation the region's leaders are striving so hard to avoid.
Perhaps the most important positive effect of exchange-rate appreciation would be to help promote the development of domestically-oriented industries..., thereby alleviating some of the region's mass underemployment.
To be sure, there are important differences between the oil exporters and the Asian economies. With world energy prices at record highs, it makes sense for oil economies to run surpluses... But flexible exchange rates are still the right way for the region to develop a more balanced economic and financial base. As for the US, it makes little sense to support dollar currency pegs in any large emerging market... This is no time for oil currency hypocrisy.
Posted by Mark Thoma on Wednesday, June 4, 2008 at 02:52 PM in Economics, International Finance, Policy |
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