Farrell: US, China Won't Sign 'Plaza Accord'

In 1985, the heavies gathered at the Plaza Hotel on 59th Street in New York and hammered out a currency agreement. (This was, by the way, pre-Donald Trump ownership of the Plaza, when it was one of the world's premier hotels.)

At the time, Japan was going to buy the parts of the world it didn't already own. They probably grew to regret the agreements made that day.

Japan allowed the yen to appreciate, causing an influx of money into the country. The rise in the yen made their exports uncompetitive, and, says Barron's, the weekend publication from The Wall Street Journal, this was largely responsible for the Japanese malaise of the last twenty years.

The International Monetary Fund gave it a try this past weekend, but no deal was in sight. Perhaps the Chinese learned from the Japanese experience long ago, or perhaps they are just sick of being labeled the cause of the world's economic/trade problems.

The hostility between Washington and Beijing has, says the Financial Times of London, escalated "into something resembling trench warfare."

The US is (almost) saying what everyone knows, and that is China is manipulating its currency by keeping a hard peg to the dollar when, if left by itself, the renminbi would appreciate significantly. In so doing, say China's critics, they are preventing global recovery by hoarding the market for exports.

With some justification, the Chinese say the problem is super loose monetary policies in the Western world. And this is before the expected QE II flood of new dollars the market expects come the Fed meeting in early November.

The risk is that we are slipping into a locked-in currency war that leads to protectionist trade policies. You think we would have learned from the 1930 experience with the Smoot Hawley tariff debacle, but this sort of evolves around you. Before you know it, you are on the verge of some serious stuff. The IMF proposed inserting itself into the dispute by offering "evenhanded surveillance," although no one seemed to know what that meant. God knows I have no clue. In any event, the IMF was not given any new powers.

China is not going to cede its export markets, especially when so many of their manufacturing industries operate with very thin margins.

But China wants its voice heard on the world stage in a much louder fashion. Negotiating an increased say in IMF affairs from its roughly 3% vote could be alluring. The US has something like a 15% vote and the Chinese look at their balance of over $2 trillion in currency reserves (much of it in dollars) and the status of the US as the world's largest debtor nation, and wonder. There is a new reality and it has to be dealt with.

'Other New Realities in the World...'

There are other new realities in the world. My pal Sydney Williams wrote that Credit.com says 21.5% of all homes have negative equity at the end of the second quarter. With the U-6 measure of unemployment back to 17.1%, Dave Rosenberg of Gluskin Sheff in Toronto says 1 in every 7 Americans is "underemployed."

Also, 1/3rd of all Americans have a FICO score so low they wouldn't qualify for a mortgage no matter the size of the down payment. Consumer credit was off $3.3 billion last month and that was the eighteenth month out of the past nineteen consumer credit was down. Credit card debt has been down 24 months in a row.

Yet we hear talk of QE II to pump more money into the economy to encourage borrowing, investment and spending. As it is, Dave Rosenberg says 20% of consumer income comes from the Federal government (social security, unemployment). There are about 4 million existing homes being offered for sale and there is an almost equal number in "shadow inventory" waiting its turn. Tax rates for next year are unknown, health care costs are uncertain and the financial regulatory standards are yet to be defined. There is no simply easy answer to this. And that seems to me to be what the QE II adherents want.

One more dose of "shock and awe" and we will be ok. Uncle Doug Kass says this round will be more like "shucks and aww." I couldn't agree more. There is over $1 trillion now on deposit with the Fed not being loaned out. Uncertainty among consumers and businesses prevails and more liquidity will not change that.

The Wall Street Journal said in an editorial it's "not a lack of capital, but a capital strike as businesses refuse to take risks...due to uncertainty. More Fed easing in this environment risks pushing on a string, adding money to little economic effect."

But what is likely to occur is the wrath of the international trading world will be stoked, as we debase our currency further (put in another trillion or so and watch the dollar fall even more in value). Our exports will momentarily do well, but inevitably the rest of the world will retaliate. And forget about China falling on its sword for the good of the world.

NOTE: I stood an extra half hour on Fifth Avenue to watch the Columbus Day parade and to cheer the Grand Marshalls, my pals, Jason Trennert of Strategis, and Maria Bartoromo of CNBC. It was a beautiful day. (Had it been raining I would have emailed my best wishes.) But I think being Grand Marshall is a big deal!

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