...we believe it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate systems. This is particularly important for those countries whose currencies are significantly undervalued.
This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same.
This sets off a damaging dynamic, described first by my former colleague Ted Truman, as "competitive non appreciation." Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies. The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports.
It is unfair to countries that were already running more flexible regimes and let their currencies appreciate. And it requires a cooperative approach to solve, because emerging economies individually will be less likely to move, unless they are confident other countries would move with them.
This problem exposes once again the need for an effective multilateral mechanism to encourage economies running current account surpluses to abandon export-oriented policies, let their currencies appreciate, and strengthen domestic demand. This is a necessary complement to the adjustments being undertaken by countries running current account deficits. A cooperative rebalancing of policy in this direction would be better for overall growth.
This issue was well-known to the group of economists who gathered in Bretton Woods, New Hampshire, to refashion the war-ravaged global financial system in 1944. The Articles of Agreement of the IMF, drafted at that conference, contain a now-obscure paragraph calling on the Fund to issue reports on countries with "scarce currencies"--what today we would call countries running persistent surpluses--"setting forth the causes of the scarcity and containing recommendations designed to bring it to an end. That clause now reads like a relic of a bygone monetary era; But the problem it was drafted to address--the threat to global financial stability posed by persistent, large surpluses--is as salient today as it was then.
Full article HERE.
Now it's getting interesting. Does this sound like cooperation, or an escalation of words, that leads to something else? But there's more.
The US is also concerned about China's recent muscle flexing regarding rare earths. From the AFP:
The United States called Wednesday for the world's major economies to look at ways to ensure a free flow of rare minerals used in gadgets after Japan said China cut off shipments for political reasons.
US Commerce Secretary Gary Locke praised the Asia's two largest economies for agreeing to talks next week and hoped "there will continue to be a free flow" of rare earths.
"That's something that I think all the countries perhaps will have to address in the upcoming G20," Locke said, referring to the November summit in South Korea of 20 major economies.
But just recently, Chinese Premier Wen Jiabao spoke directly to Europe, imploring them:
"I say to Europe's leaders: Don't join the chorus pressing [China] to revalue the yuan," he said during a speech in Brussels Wednesday. (source)
So it looks like a trilateral world is forming here. The US, the EU, and China. But what about Russia? Well, my post Pre - G20 Meeting between France, Germany, and Russia - What's Cooking? speculates where Russia feels it belongs, or at least what Europe believes. Russia is basically being courted by both China and the EU. And it looks to be the one to tip the balance. And what's really at stake here? The US paper dollar standard.