In spring 2009, global central banks got together to slash interest rates and print money and generally “save” the world.
Today, the world’s finance ministers are meeting in Shanghai, and plenty of people are hoping that they’ll pull a rabbit out of the hat to juice up the global economy again.
Are we likely to see some sort of grand bargain?
The most dramatic dollar intervention since Nixon’s day
In 1985, the major developed-world economies of the time – the US, France, West Germany, Japan and the UK – signed a deal in the Plaza Hotel, in New York. That deal was the Plaza Accord.
In a review paper last year, Jeffrey Frankel of Harvard University described it as “probably the most dramatic policy initiative in the dollar foreign exchange market since Richard Nixon originally floated the currency in 1973”.
At the time, the US dollar had soared against most other currencies in the world – by around 50% between 1980 and 1985. Some even proclaimed a “speculative bubble” in the dollar.
The dollar strength was one side effect of Federal Reserve chairman Paul Volcker’s decision to throttle inflation out of the US economy by raising interest rates hard and fast in the early 1980s.
A strong dollar hurt exports and boosted imports, so America was running a record trade deficit, helping to inspire talk of protectionist trade policies (it’s not unlike today, in many ways.).
The dollar strength started to rattle everyone involved, and by 1985 – even before the Plaza Accord was announced – it was clear that appetite was growing for intervention to weaken the dollar, and the US currency peaked. After the deal was done, the dollar fell by about 40% between 1985 and 1987, notes William Watts on Marketwatch.com.
Could we see a Shanghai Accord?
Some are hoping that the current meeting of G20 ministers might result in something similar.
Bank of America Merrill Lynch (BoAML) has been talking about the idea of a “Shanghai Accord”. The current G20 meeting offers the “opportunity for policymakers to seize the ‘expectations’ initiative”.
The important thing about the Plaza Accord, they reckon, is that “the global policy coordination inspired corporate and household animal spirits”. It wasn’t just about currencies. It was generally “pro-growth”.
It also came at a time when, like now, “interest rates and inflation were low, but macro cycles were out of sync and exchange rates were targeted to induce macro convergence”.
This time, says BoAML, the agreement would focus on China. Its wish list includes a one-off devaluation in the Chinese yuan; support from the Federal Reserve for vulnerable emerging markets (similar to the “swap lines” introduced during the financial crisis); a statement by the Fed to pursue “dollar stability” – ie stop the dollar getting any stronger; and public spending on infrastructure by the US, the UK, and Europe in general.
That’s quite some list. Could it happen?
So far it doesn’t sound like it. Wolfgang Schäuble, the German finance minister, is not a popular man in the financial press as far as I can see (outside Germany certainly – I don’t know how he goes down with the locals).
But he talks a lot of sense. That doesn’t necessarily do you a lot of favours in politics, but when it comes to monetary policy, it’s nice to see that at least one person with some level of power recognises that using ever-wackier forms of “stimulus” is only papering over structural problems that need to be addressed.
According to Bloomberg, he reckons that “using debt to fund growth just leads to ‘zombifying’ economies”.
That doesn’t sound like someone who’s open to grand deals to buoy the global economy.
At the same time – and BoAML admits this – there’s probably not enough of a sense of urgency and panic yet.
Politicians will tend to act radically only when given permission to do so by a sense of crisis, particularly if they have to act as a collective. Right now global markets might be wobbly, but we’re not at the sort of “do or die” moment that generally inspires action.
However, it’ll be interesting to see what does come out of the meeting. We might get some indication of what the next cunning plan will be when and if we hit the next crunch point.
I’ll be watching particularly closely for any more discussion on banning big denomination bills and capital controls, along with comments on negative interest rates. Forewarned is forearmed, as they say.