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Institutionalized nonsense

When, last week, the Treasury issued its currency manipulation report, I thought it was a joke. Treasury put Germany and Italy on its "monitoring list" of countries suspected of "currency manipulation."Germany and Italy are, of course, part of the Euro, the whole point of which is that they cannot, individually, "manipulate" their currencies, whatever that ...

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When, last week, the Treasury issued its currency manipulation report, I thought it was a joke. Treasury put Germany and Italy on its "monitoring list" of countries suspected of "currency manipulation."

Germany and Italy are, of course, part of the Euro, the whole point of which is that they cannot, individually, "manipulate" their currencies, whatever that means. It is precisely this inability to devalue -- to "manipulate" the Drachma to regain "competitiveness" (another meaningless term) -- that conventional wisdom bemoaned of Greece.

I had a little chuckle, envisioning some frustrated mid-level Treasury economist bemoaning the trade and currency idiocy floating around Washington, putting this little message in a bottle to see if anyone noticed the reductio ad absurdum.  If so, hello there, somebody noticed.

But then  read the report.

It is shocking. It's supposed to be about "currency manipulation." The statutory mandate is clear (p. 3):
Under Section 3004 of the 1988 Act, the Secretary must: “consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
Whatever "unfair competitive advantage" means -- remember, trade is trade, not a basketball game, and only is done if it benefits both parties -- this sounds pretty clear: it's about currencies. If you don't have a currency, you can't manipulate it. The additional statutory guidance quoted on p. 3 also all ends with "currency."

This minor technicality will no longer constrain our Treasury, in its desire to dictate trade. In big bold letters on p. 2
"Starting with this Report, Treasury will review and assess developments in a larger number of trading partners in order to monitor for external imbalances and one-sided intervention."
(Just what is a "two-sided intervention?" Exchange rates that go both up and down?) More specifically,
Beginning with this Report, Treasury will assess all U.S. trading partners whose bilateral goods trade with the United States exceeds $40 billion annually.
(My emphasis.)

Bilateral trade "deficits" are meaningless. China sends us shoes, Australia sends China coal, the US sends Australia airplanes. Pieces of paper flow the other way. We all come out ahead despite three bilateral "deficits." (In quotes as this is a horrible word too, implying something is deficient every time you go to the Starbucks and suffer a coffee trade "deficit." )

Bilateral goods deficits are even more meaningless. Italians send us prosciutto (goods), we send them software (services), and this is somehow a problem reflecting "currency manipulation?"

Italy's sins, meriting "monitoring:"
Italy recorded a current account surplus of 2.5 percent of GDP in 2018, while its goods trade surplus with the United States rose to $32 billion. 
Aha, Italy, that dynamic powerhouse, is growing exponentially, at the expense of all those unemployed pasta makers in Appalachia, because it somehow devalued its corner of the Euro?*

Italy should be running big trade surpluses. That is the only way it will pay down its vast foreign debt. If Italy were running trade deficits we should worry.

Here is the whole table of "criteria."

Institutionalized nonsense

And thus we get to the madness that a country without its own currency can be accused of its manipulation.

The only possible conclusion: Treasury now wants to jawbone countries into directly controlling bilateral trade in goods.

My  secretly sane economist at Treasury did, then, sneak in a pretty good description of Italy's problems: 
Italy’s competitiveness continues to suffer from stagnant productivity and rising labor costs. The country needs to undertake fundamental structural reforms to raise long-term growth – consistent with reducing high unemployment and public debt – and safeguard fiscal and external sustainability.
Yes. But "fiscal and external sustainability" is not about recycling your Gucci bags. It means running trade surpluses with which to pay down debts! This report now flatly contradicts itself.  Then, in case you need banging over the head about how there cannot be a whiff of manipulation here,
The ECB has not intervened unilaterally in foreign currency markets since 2001, 
a phrase repeated poetically regarding the other suspect countries, Ireland and Germany.

I called this post "institutionalized nonsense." Yes, every president brings to his (or, someday, her) Administration some nutty ideas, some campaign rhetoric that does not correspond to cause-and-effect reality. Sensible cabinet secretaries and career staff must indulge the rhetoric.

But by this document the Treasury is institutionalizing nuttiness -- setting up rules and procedures that monitor bilateral goods "deflcits,"  and waste our Nation's vanishing prestige haranguing countries about their "macroeconomic policies" that produce such undefined and ill-measured ephemera. Why listen to us on, say Iran sanctions or Tiananmen square if we are going to indulge in this sort of nuttiness?

Meanwhile, the administration continues to badger the Fed to lower interest rates in order to... well, to manipulate our currency!

*Note to the humorless: I don't mean to disparage Italy, actually the home of excellent small manufacturers. Also, if Italy does introduce MiniBots, or go off the Euro then the fun might really begin. But the Treasury report is not about this. Next post.
John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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