Currency warriors take aim: Wounded beware

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Tax fairness activists got some positive news this weekend. Though it got only passing mention in the final communiqué from the G20 meetings in Moscow, Finance Ministers from Germany, France and the U.K. announced the G20 was looking at how to make multinational corporations pay "their fair share" of taxes.

In a letter to the Financial Times, the three Ministers fingered the OECD as their preferred vehicle for co-ordinating a much-needed reform of corporate taxation.

Typically, in the West, corporate profits are growing faster than the economies producing them. One reason is tax avoidance strategies are successful in converting taxes payable into retained earnings.

Corporations hide cash in tax havens, and then speculate with it in foreign currency and junk bond markets. Productive investment suffers along with corporate tax revenues. Remarkably, right-of-centre governments in the U.K. and Germany joined with the French Socialists in wanting to stop corporations from presenting as profits, taxable income gone missing.

Interest rates in key Western money markets are not much above zero. In the aftermath of the 2007-2009 financial meltdown (which cost the U.S. $22 trillion according to a new report from the U.S. Government Accounting Office), the U.S. has been running loose monetary policy. Other countries have followed suit. Super cheap money has not revived the older industrial economies.

For pension funds, corporate financiers, and others with big money to lend, finding juicy returns means moving money to China, India, Brazil, Russia, and other so-called emerging market economies.

For those on the receiving end of speculative money looking for high returns, the U.S. easy money policy looks like a strategy to weaken the U.S. dollar. In 2010, the Brazilian Finance Minister was already warning currency wars were upsetting the world economy.

Low U.S. interest rates means outflows of hot money, pushing the U.S. dollar lower on foreign exchange markets.

Speculators have two ways to win on their bets. First, they get a higher rate of return than in the U.S. with, say, Brazilian bonds. Second, they can get more for their U.S. dollars when they sell through an appreciation in the Brazilian or other local currency that occurs because new money flows into the local currency.   

G7 Finance Ministers issued a communiqué last week designed to calm the foreign exchange markets. As was widely reported, it had the opposite effect. A rumour (attributed to a G7 insider) circulated to the effect the communiqué was designed to call Japan to order for its competitive devaluation as evidenced by the drop in the value of the Yen. This rumour unsettled international currency markets, and provoked renewed fears about the consequences of international currency wars.

In Moscow, G20 figures (echoing the G7) also proclaimed competitive currency devaluations had to be avoided. Of course, the reason the issue was being discussed was because of the continued "spillover effects" of loose U.S. monetary policy on the rest of the world, not just Brazil.

The G7 and G20, as institutionalized attempts at international economic and monetary policy co-ordination, are poorly equipped to handle the problems facing the world economy. Domestic policy failures in the U.S., the U.K., Germany, France, Italy, Japan, and Canada are serious, and are not about to be resolved by G7 draft communiqués. The G20 Toronto 2010 commitments to deficit reduction and fiscal tightening have made things worse, ultimately contributing to attempts to "beggar-thy-neighbour" through encouraging currency devaluation, as states look to foreign spending to replace domestic spending. Despite pressure to ease away from austerity insanity, in Moscow, the G20 agreed to maintain deficit targets set in Toronto.

Much of the world economic mess can be attributed to insufficient and inappropriate public investment and public spending in the major economies. Raising more public revenues from corporations, which presently use tax havens to avoid taxation, would help sustain new public investment to make basic human needs. If only for that reason a fairer corporate tax regime deserves support.

Imagining that easy money will eventually kickstart the investment engines of the Western economies is wrong. Ignoring collateral damage from ensuing currency devaluations is short-sighted.

What deserves more attention from policymakers and economists alike is colossal government over-spending on military items. By providing public monies to fuel its war machine, and its export trade, for decades the U.S. has been misallocating resources on a scale never seen in the history of humanity. Other leading military spenders are making the same fundamental error of neglecting needed public services and infrastructure.

Fair taxation will not fix the world economy, but it will do no harm. New public spending priorities, and tighter regulation of financial corporations, and those in the water, food, energy nexus, are both urgently needed.

Duncan Cameron is the president of and writes a weekly column on politics and current affairs.


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