Group of 20 leaders meeting next month ought to discuss a plan to strengthen undervalued currencies, similar to the Plaza Accord in 1985, Harvard University historian Niall Ferguson said.
“The real currency war is actually between Chimerica -- China plus America -- and the rest of the world,” Ferguson said in an interview at the World Knowledge Forum in Seoul. “It would be much better to have some kind of Plaza-like international agreement and I very much hope that at the G-20 summit in Seoul next month this will be No.1 on the agenda.”
The Plaza Agreement reached in 1985 prompted a decline in the U.S. dollar against its Japanese and German counterparts.
Brazilian Finance Minister Guido Mantega said last month that a “currency war” was under way, in which economies are weakening currencies to support exports. At an International Monetary Fund meeting this month in Washington, finance chiefs failed to narrow differences over currencies, with China accused of undervaluing the yuan and low U.S. interest rates criticized for flooding emerging markets with cash.
“Currency appreciation is necessary,” Ferguson said in the interview late yesterday. “If you insist on building up a vast horde or dollar-denominated reserves you will create distortions in the world economy that will ultimately come back and bite you.”
China doesn’t need a dollar peg, because its workers are making enormous gains in productivity, he said.
The Harvard professor said there’s a higher chance of “sub-par growth” among developed countries rather than a double-dip recession, with the U.S. and major industrialized economies “bumping along a lot closer to 2 percent per annum than they would like to be.”
Out of Ammunition
Because developed economies have already used “massive” deficit spending and monetary easing to overcome the economic slump, “the idea that there is some additional ammunition in the locker to be fired again is completely misconceived,” he said.
The U.S. needs to come up with a plan to deal with its growing debt, Ferguson said.
“The United States is in a fiscal hole of monumental proportions and we have to get real about this,” he said. “At some point the Greek tragedy will happen to the United States if it carries on in this vein.”
There will be a move out of the world’s “massive exposure” to U.S. Treasuries into higher-yielding assets at some point, Ferguson said, adding that the switch could be “quite sudden.”