Peterson Institute for International Economics Update Newsletter
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PIIE Update Newsletter
September 11, 2012

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Time for a Fightback in the Currency Wars

C. Fred Bergsten and Joseph E. Gagnon
  C. Fred BergstenJoseph E. Gagnon The single most overlooked cause of the economic weakness in the United States and Europe is the global currency wars. Governments in many developing economies and a few higher-income countries are purchasing reserves and other foreign assets at an unprecedented rate. The authors estimate that the amount of such purchases in 2011 that exceeded reasonable requirements is $1 trillion. If this excessive accumulation of official assets were to cease, the US trade deficit would fall by $150 billion to $300 billion, or 1 to 2 percent of gross domestic product. Between 1 million and 2 million jobs would be created.

The International Monetary Fund and World Trade Organization should implement long ignored rules that forbid currency manipulation to maintain trade surpluses. If these multilateral remedies continue to fail, the aggrieved countries should act together to induce currency aggressors to mend their ways. The most direct action would be countervailing currency intervention through which the US Federal Reserve and the European Central Bank buy foreign currencies to offset the exchange rate impact of others' aggression. Another option would be a surcharge on imports from currency aggressors, as adopted unilaterally by the United States in 1971. A third approach would be to impose a transactions tax or a withholding tax on US and European assets accumulated by the aggressors. Given the huge costs of currency aggression, such measures may become necessary to resolve this global systemic problem and support recovery in the United States and Europe.

>> Read full op-ed
>> Read extended version
>> Listen to related interview: Global Conflict over Exchange Rates

The Costs of Not Granting Russia PNTR

Anders Åslund
  Anders Åslund On August 22, Russia became the 156th member of the World Trade Organization (WTO). The United States has spent 19 years negotiating favorable conditions for its trade in goods and services with Russia. The volume of US exports of merchandise and services to Russia is estimated to double from $11 billion in 2011 to $22 billion over about five years, if WTO rules apply to US trade with Russia. But absurdly, the United States might not benefit from all the concessions it has extracted from Russia because it has not granted Russia permanent normal trade relations (PNTR), also known as most favored nation, which the WTO requires. The reason for this conundrum is that the US Congress has not terminated the application of the Jackson-Vanik amendment of the Trade Act of 1974 to Russia. The Jackson-Vanik amendment requires annual reviews of Russia. It was designed to facilitate the emigration of Jews from the Soviet Union, and it did so successfully in the 1970s. Today, however, this legislation is altogether obsolete and only arouses ridicule among Russians. In short, the Congress should do its utmost to grant Russian PNTR in September. The maintenance of the Jackson-Vanik amendment for Russia does not help human rights. It only hurts US exports.

>> Read full op-ed
>> Listen to related interview: A Missed Opportunity on Trade with Russia
>> See also: The United States Should Establish Permanent Normal Trade Relations with Russia

India: Favoring Foreigners in Finance

Arvind Subramanian
  Arvind Subramanian Can Indian nationalism be harnessed to promote sound economic policies? That seems an odd question to raise at a time when Indian policymakers have rightly been taken to task in recent months for the heavy-handed and arbitrary treatment of foreign investors. But, in the financial sector, policies penalize or tax Indians while treating foreigners more favorably. Even more worryingly, all the signs indicate that this wedge may even diverge to the advantage of foreigners and to the detriment of the economy. One of the two policies in question is the statutory liquidity ratio (SLR), a seemingly arcane measure under which Indian banks are forced to hold a hefty portion (23 percent) of their assets in government bonds. This policy would rank high among the bad relics of pre-reform India. The second is the openness to foreign capital, especially foreign financial flows. Going forward, it is likely that one bad policy—the SLR—is unlikely to be eliminated while the other—capital account opening—is likely to be pursued vigorously. Most Indian savers are unlikely to benefit from the expanded choice. More importantly, the fact of high deficits and macroeconomic vulnerability makes these unpropitious times for further opening to capital flows. Though the intent behind these policies may not be to do harm, the impact is that the Indian government will be favoring rich foreigners while penalizing poor Indian savers.

>> Read full op-ed

Peterson Perspectives Interviews

audio  New Turbulence in US-China Ties: Part I
Nicholas R. Lardy explains why the Chinese press reacted negatively to Secretary of State Clinton's recent trip but says it is too early to tell whether economic relations will be affected.

audio  New Turbulence in US-China Ties: Part II
Nicholas R. Lardy says that criticism of China by the Obama and Romney campaigns are unlikely to lead to concrete actions against China in the economic sphere, no matter who wins.

audio  The ECB's 'Firewall': Has a Corner Been Turned? Part I
Jacob Funk Kirkegaard and Edwin M. Truman have differing views on whether the European Central Bank's new framework for bond purchases will work to help stabilize the crisis.

audio  The ECB's 'Firewall': Has a Corner Been Turned? Part II
Jacob Funk Kirkegaard and Edwin M. Truman explain the role of the International Monetary Fund in Europe and assess the obstacles that are crucial to overcome in the next several weeks.

audio  Europe: A Pause in the Crisis? Part I
Nicolas Véron says that because of recent actions by Greece and the European Central Bank, the threat of a breakdown has lifted at least temporarily.

audio  Europe: A Pause in the Crisis? Part II
Nicolas Véron outlines the many difficulties and obstacles inhibiting Europe's commitment to achieve a banking union.

audio  A Missed Opportunity on Trade with Russia
Anders Åslund says that the United States is not able to take advantage of Russia's accession to the World Trade Organization (WTO), because a measure to grant permanent normal trade relations (PNTR) to Russia has stalled in Congress.

audio  Global Conflict over Exchange Rates, Part I
Joseph E. Gagnon and John Williamson discuss the phenomenon of currency manipulation by China and other countries and why the United States and Europe are adversely affected.

audio  Global Conflict over Exchange Rates, Part II
Joseph E. Gagnon and John Williamson explain why China and other developing countries in Asia and Latin America feel the need to accumulate reserves and whether their actions are justified.

audio  Global Conflict over Exchange Rates, Part III
Joseph E. Gagnon and John Williamson discuss the need for greater enforcement of norms on exchange rates and reserve accumulation by the International Monetary Fund and the World Trade Organization.

Recent Blog Posts

RealTime Economic Issues Watch   China Economic Watch    North Korea:  Witness to Transformation
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An East European Perspective on the Euro Crisis

China, Japan, Korea: Will History and Politics Trump Economics?

Lessons from Slovenia's Curiously Unexpected Financial Crisis

Is That All There Is? The Remarkably Small Costs of Quantitative Easing

What's Next for the ECB?
  What China Can Learn from Germany

Is China Becoming More Expensive?

The Trans-Pacific Partnership: Whither China?

Investment Above All

China's Recent Financial Reforms: More than the Sum of the Parts?
  The Supreme People's Assembly Meeting

Glimpses: Traces of Life: South Korean Photography, 1945-1992

Sources: Lankov on Russia, the Koreas and Koreans

Captain Renault Department: "Prosecutors Link Money from China to Iran"

China, Japan, Korea: Will History and Politics Trump Economics?

PIIE Noted in the News and on the Web

Bloomberg TV
Posen Says Central Banks Should Step Up Easing
Speaking from the Jackson Hole Summit, Adam S. Posen says the US Federal Reserve's mandate is to get unemployment to a sustainable level and to prevent inflation from getting too low or too high. Posen says quantitative easing can help the Fed do its job to lower the unemployment rate.

Fox Business
Is QE3 What the Economy Needs?
Joseph E. Gagnon argues that the US Federal Reserve should do a third round of quantitative easing (QE), while Jerry Webman of OppenheimerFunds argues the Fed should not take action. See also: Is That All There Is? The Remarkably Small Costs of Quantitative Easing

Bloomberg Radio
Kirkegaard Says ECB Must Push Spain, Italy
Jacob Funk Kirkegaard discusses the European Central Bank's new government bond-buying program and explains what the decision means for US markets.

Yahoo! Finance
ECB's New Government Bond-Buying Program Is a Game Changer
Jacob Funk Kirkegaard rates the European Central Bank's new plan as not a Band-Aid but rather a policy that "really does have the potential to be a game changer" in solving the euro area's financial crisis.

Bloomberg TV
ECB Decision Will Calm Bond Markets
Anders Åslund says the European Central Bank's decision to give up its preferred creditor status is a critical change that was needed to help raise confidence in the bond markets.

Preview of Our Next Issue

Working Paper
Capital Account Policies and the Real Exchange Rate
Olivier Jeanne

Working Paper
Choice and Coercion in East Asian Exchange Rate Regimes
C. Randall Henning

Working Paper
Prospects for Services Trade Negotiations
Jeffrey J. Schott, Minsoo Lee, and Julia Muir
In This Issue

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The augmented misery index rose sharply in the first half of 2012 to 14.2 due largely to a steep jump in the headline consumer price index and a drop in housing prices, calculate Gary Clyde Hufbauer and Julia Muir.

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