This weekend, Treasury Secretary Steven Mnuchin will travel to Germany to attend his first meeting of G20 finance ministers. This has solicited a collective yawn from the markets, but that fact alone is actually noteworthy.
Before 2008 these conferences were big events, in particular for currency markets. That’s because the specter of coordinated policy or active currency intervention arising from these gatherings was always a possibility – due to two legendary foreign exchange events called the Plaza and Louvre accords.
Here’s a short history lesson: After the election of Ronald Reagan, the U.S. dollar appreciated as much as 93 percent on high interest rates and U.S. economic growth. That put such pressure on major parts of the U.S. economy that then-Treasury Secretary James Baker orchestrated the 1985 Plaza Accord, which was an agreement by the world’s top six economies to weaken the dollar.
It was so successful that barely a year and a half later that same group met again and agreed on the 1987 Louvre Accord, which was a pact to strengthen the greenback again. Both coordinated efforts worked so well that for decades afterward, any time a bunch of finance ministers gathered, there was currency market speculation about some coordinated policy moves being enacted as a result.
But today’s reality is that, outside of some sporadic, short-term currency interventions, cooperation among major economies in big deals is notoriously absent. Since 2008 the prevailing sentiment has been that each central bank is looking out for its own best interests.
This is the uncooperative environment that Treasury Secretary Mnuchin will find himself up against this weekend in Germany. No doubt this same environment has played a role in the decline of the British pound, which recently has been one of the world’s worst-performing currencies. It took another hit this week when Prime Minister Theresa May’s path to invoking the official start to Brexit was cleared.
My View: Where are those famous “smoke-filled back rooms” when you need them? Instead of reaching agreements that benefit the entire global economy, the finance ministers seem bent on defying cooperation and focusing only on their own national best interests. Honestly, I am not hopeful that this mindset is going to change anytime soon, but we could all benefit if it did.
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