By Michael O’Neill
The G-7 ain’t what it used to be. President Trump has seen to that. He has transformed the annual gathering of the leaders of the major industrial countries. It used to be a forum for dignified discourse on international trade, and macroeconomic management. It is now a rambunctious banquet for bickering, back-stabbing, and vitriol. It wasn’t any different at the 45th G-7 Summit in Biarritz, France and global financial markets suffered.
The Group of Seven, more commonly called the G-7, came into being as a result of the 1973/74 oil crisis. It began as a meeting of Finance Ministers from West Germany, France, Great Britain, and the USA. Japan joined in 1974 when the membership became known as the Group of Five. In 1975, a French summit attracted the leaders from those same countries, invited Italy, and it became known as the G-6. Canada joined in 1977. Russia formally joined the group in 1988 but was suspended in 2014. Today, the G-7 leader’s Summit is a major circus of security and hype with President Donald Trump as ringmaster, regardless of whatever country is hosting.
Mr. Trump upstaged the hosts at the G-7 meetings in Italy 2017, Canada 2018, and France, last week. In Italy, Trump clashed with the other members on climate change, trade, and immigration. The official communique had to include a section to explain that the US did not join the consensus on climate change. The Canadian G-7 ended with Trump accusing Prime Minister Trudeau of making “false statements” and threatened not to endorse the communique. The just-concluded G-7 meeting in France started with Trump slapping new tariffs on China and finished with Trump offering a more conciliatory tone to Beijing. The media ignored the rest of the agenda. He even haunted G-7 meetings that he didn’t attend. At the 2016 G-7 meeting in Japan, President Barack Obama said of the other leaders; “They are rattled, and for good reason. Because a lot of the proposals he has made display either ignorance of world affairs, or a cavalier attitude, or an interest in getting tweets and headlines, instead of actually thinking through what it is required to keep America safe and secure and prosperous, and what’s required to keep the world on an even keel.” Mr. Obama proved prescient.
Financial markets get rattled before and after Trump’s attendance at the Summit’s, but the reactions are short-lived. Traders are starting to realize that for the most part, Trump’s bluster is more “hole than doughnut” and prices return to pre-bluster levels within a day or two.
Some G-7 Summits have teeth, just not the Leadership ones. The G-7 Finance Ministers are the pointed end of the spear during times of financial crisis. When they act, they are effective.
A massive earthquake devastated Japan on March 11, 2011. The Japanese yen soared as locals repatriated offshore assets, much to the dismay of Japanese officials as the rising yen was having “adverse implications for financial stability.” On March 17, the G-7 Finance Ministers and Central Bank Governors announced: “the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan, on March 18, 2011, in concerted intervention in exchange markets.”
It worked. USDJPY rose from a low of 76.55 on March 15, 2011, to 85.30 by April 7, 2011. Prices retreated in an orderly manner to the end of the year, but intervention concerns helped put a floor under the currency pair.
The most successful G-7 currency intervention occurred thirty-four years ago. American officials were upset about the nearly 80% appreciation of the US dollar up to September 22, 1985.
Chart: US dollar Index, monthly showing price drop from Plaza Accord
Source: CNBC markets
The so-called “Plaza Accord,” named for the New York hotel where the G-5 meeting took place, rectified that situation. West Germany, France, Japan, the UK and the US joined forces to sell the US dollar against the German mark and Japanese yen. It worked, fabulously. The US dollar plunged 50% against those two currencies within two years.
Currency intervention is a popular tool among some central banks. This year, the Reserve Bank of Australia, the Reserve Bank of New Zealand, and the Swiss National Bank have intervened to devalue their currencies. However, not all banks agree. The Bank of Canada has not intervened in FX markets since September 1998. They changed their systematic intervention policy because they said it was “ineffective in resisting FX movements due to fundamental factors.” Arguably, concerted intervention is more effective than that of a single central bank, mainly due to the combined resources that are available.
Currency intervention is also a hot topic thanks to President Trump. He called China a “currency manipulator” and the US Department of Treasury agreed. At the beginning of August, Trump said: “China has always used currency manipulation to steal our business and factories, hurt our jobs, depress our workers wages and harm our farmers’ prices. Not anymore!”
The Chinese yuan (renminbi) fixed at 6.8482 on January 2 and 7.0835, August 27. That’s a loss of 3.4%., about the same as the British pound and Australian dollar. The New Zealand dollar is down 4.7% while the Japanese yen and the Canadian dollar gained around 2.5%.
China’s massive trade surplus with the US is a major irritant to the President. American shoppers are addicted to low-cost Chinese products, and Trump wants to change that. He knows how successful the Plaza accord was in devaluing the US dollar, so he may be thinking about a “shopping-Plaza accord (thanks Mr. Peters) to devalue the greenback. The Fed can slash interest rates and sell all the US dollars they can print, while specifically targeting individual currencies. They would have a much more difficult time selling dollars to buy Chinese yuan as it is not a free-floating currency. Also, China has rather substantial currency reserves. Even more problematic would be the flood of safe-haven US dollar demand as investors seek shelter from the global economic devastation from a “shopping-Plaza accord” which suggests even unilateral US currency intervention may be ineffective.
President Trump’s antics turn G-7 Leaders Summits into a sideshow but G-7 Finance Ministers meetings remain effective tools to address current and future economic and financial challenges.