I continue to address audiences in Dubai, Singapore and Shanghai on applying gametheory concepts to the international crisis…
Continuing the argument provided in the Financial Times letter, the signalling game between China and the US on the role of the US dollar in international markets is considered as a template for analysis.
Download
- Why G20 Summits should begin to signal a managed exchange rate regime to control the financial crisis (Word)
- Signalling Cycles & Present Financial Crisis (PowerPoint Slidehow)
- China options & G20: RMB as an emerging new currency (Word)
- New Economic Order:China, US Dollar & the G20 (PowerPoint Slideshow)
- Shanghai Interview - My interview in Oracle Bay, after addressing executives at Shanghai’s Tongyi University (PDF)
If it is unlikely that China moves first on its exchange rate to revalue to allow more imports and help in the fight to control domestic inflation then will the US move on a real depreciation of the US dollar to realise a long-term economic growth through a reliance on export growth. Who will prevail as the US needs to export more and China needs to fight inflation? It may require a G20 initiative on managing exchange rates as global imbalances continue to hamper a world economic recovery.
Related posts:
What are Policy A and Policy B entails. There are new signals. The Gulf nations might drop USD to price oil, UN calls for new reserve currency. China launched yuan government bond
I reckons that China and many rich nations still need USD to feature in the new curreny regimes as they have reserves locked in USD government bond. The balance of trade, interest rate and inflation are also important factors.
The USA government may have accelerated the shift to a new currency regime with the one trillions over rescue package.
I do not know how the implementation for business where gold price, oil price now quoted in USD changes to something else. Does it mean an individual where has investments in USD will overnight incurs loss.
Whichever the case, the players involve has these in their mind.
Prof. Paddy,
I tried to download the power point file Signalling Cycles & Present Financial Crisis but have been unsuccessful. Error message was that the format was not recognised. Thank you.
The ppoint slides are now ok to download…..the issue of the US dollar role as an international currency is an issue to be discussed ..in the interregnum, it will continue to devalue [and by less than a number based on the size of the total public debt, due to its contined demand as a currency] adn gold will rise and Euro will strengthen…..as the DJIA goes over 10,000, we are predicting Q1-Q2 recovery with a probability of a contined devalued dollar, an appreciating RMB by 10%] and currency to be on Agenda for G20 in June 2010 in Canada…patrick
There are many signals and recently the Independent newspaper carried a story that the GCC states may be considering a basket of currencies including the US dollar as one way to define an international price for oil..A meeting allegedly was scheduled to discuss this possibility and we note that The Governor of Central Bank of Saudi Arabia subsequently denied such an event.
I agree with your point that there are many options and plans but until there is a G0
Blog on http://www.mcnutt.tm.mbs.ac.uk
Web page:www.patrickmcnutt.com
The Global impact of China RMB v US Dollar Game China
Patrick A. McNutt
_____________________________________________________________________
Today, November 11th 2009, financial media are continuing to report the signals on the possibility of an appreciating RMB in 2010 as world leaders, especially those in emerging markets, realise the significance of currency misalignments as hampering a return to economic growth. The signal is timed to coincide with the APEC meetings. Patrick McNutt has consistently argued that China and US are in a non cooperative signalling game and we can observe the signals from both sides on the role of the US$. Check the critical time line chart available on http://www.patrickmcnutt.com
Background
Developing ideas introduced initially on live interview discussion with Bernard Lo on Bloomberg TV’s Asia Confidential 29 September 2009 [short video on http://www.patrickmcnutt.com , Professor Patrick McNutt of Patrick McNutt & Associates, Dublin, and Visiting Fellow at Manchester Business School, identified exchange rate misalignments and currency issues as important issues to be addressed in this economic recession and has consistently recommended that currency and the role of US dollar should be an agenda item at the G20 Summit meetings – it did not happen in 2009, and signals in late 2009 hint at a possibility that they could be on the agenda at the G20 meeting in June 2010 in Canada.
Many governments are now expressing concerns at the currency misalignments – they worry about the economic effects that exchange rates can have on their monetary policy and on exports. Should they keep their currencies low in order to sustain exports? McNutt has argued the importance of export-led growth in emerging market economies in speaking engagements and at Alumni events in Singapore, Shanghai and Dubai, hosted by Manchester Business School; check supporting documents on http://www.patrickmcnutt.com.
$$ Game On: China and US
China has signalled in 200 that fighting inflation is a number one priority and People’s Bank of China (PBOC) has signalled this during 2009 and followed with action on reserve requirements. They are a key policy tool at PBOC in reaction to problems from the exchange rates. China has in effect a quasi-fixed exchange rate with US dollar and this compromises their ability to use monetary policy like interest rates to control inflation. Any rise in Chinese rates could lead to significant capital inflows putting more upward pressure on China’s currency.
If it is unlikely that China moves first on its exchange rate to revalue to allow more imports and help in the fight to control domestic inflation then will the US move on a real depreciation of the US dollar to realise a long-term economic growth through a reliance on export growth. Who will prevail as the US needs to export more and China needs to fight inflation? It may require a G20 initiative on managing exchange rates as global imbalances continue to hamper a world economic recovery.
Prognosis: end 2009/2010
In the interim, China is signalling and the markers are building in a likely appreciation of the RMB – observers of the unfolding game are inferring what they believe China has signalled and for the moment China is happy to allow such inferences to persist ahead of the G20 in 2010. If the world’s trading nations cannot wait until June 2010, then the US dollar will continue to devalue into Q1 2010: our estimates include a Sterling/US dollar at £1 = US dollar 2.20-2.40 and a signalled (forecasted) appreciation of the RMB to within the 6.4 – 6.2 range against the RMB and a possible return to the quasi-peg with the US dollar that China suspended in 2005. G20 negotiations could more easily achieve an interim two-year non-binding agreement on managing exchange rates in order to minimise the impact of currency misalignments on prolonging the economic recession. There is, however, a classic Prisoners’ Dilemma: with a devaluing US dollar, China does not benefit from a devaluing US dollar, the US gets to export more and export US deflation around the world. A third party resolution is required, and the G20 provides an opportunity to resolve this dilemma. APEC is a forerunner to the G20.