U.S. Treasury Secretary Jack Lew sat down with Bloomberg’s David Westin in Washington D.C. ahead of the G-20 meeting later this week in Shanghai, China.
When asked about a response from G-20 to global market turbulence, Lew said: “Don’t expect a crisis response in a non-crisis environment. You know, it’s not the job of finance ministers and central bank governors to accelerate a crisis. It’s our job to try and avoid a crisis. If you’re in a crisis, you do different things.”
He added: “I don’t think this is a moment in time when you’re going to see individual countries make the kinds of specific commitments that have been made in some other contexts that have been marked by real crisis. This is not a moment of crisis. This is a moment where you’ve got real economies doing better than markets think, in some cases.”
On currency, Lew said: “You can’t count on the United States providing all the demand for the world. You can’t be the consumer of first and last resort.” He added: “Fiscal policy can’t solve all the problems. There are structural issues that need to be addressed. In some countries it’s regulatory. In some countries it’s labor markets. In some countries it’s financial reform. Those structural issues need to be addressed. But fiscal and monetary policy are important tools. When used together, they’re powerful. And that’s the message we bring.”
On China’s challenges: “The challenges that China’s economy is facing are really quite significant. But I think that they’re being interpreted in a way that is unduly negative. China is in a transition. It’s a hard transition.”
Lew reiterated the U.S. position that China needs to let the yuan go “up and down with markets.” He said “When there is pressure to appreciate, it has to be appreciating. When there’s pressure to depreciation, we can’t complain if it depreciates.”
I’m hopeful that this will be a G20 where we take the commitment that we got in the last meetings for countries to refrain from competitive devaluation and push it a little bit.
And have that be something that is heard outside of the meeting room, but to reassure the world that that is a commitment taken seriously by the 20 largest economies.
WESTIN: What can we hope to see in the communique coming out of these meetings that goes beyond that? Or is it a matter of taking the last communique and marking it up?
I think what’s different is these last months have made clear that the weakness in demand globally is a problem that can’t be solved just by everyone looking to the United States.
I’ve been telling my counterparts for a couple of years now, I think we’re doing pretty well. They think we’re doing pretty well. But you can’t count on the United States providing all the demand for the world.
We can’t be the consumer of first and last resort. There needs to be more. And what does that mean? It means that in countries that are big economies, regions that have big economies, they need to use policy tools.
So, you know, when China looks at what can it do, it has to look at how does it stimulate consumer demand. When Europe looks at its tool, it looks beyond monetary policy when it asks what can it do with fiscal policy as well.
And in a country like Japan, where, you know, there has been two decades now of slow or negative growth, they’re careful not to make the mistake of stopping the economy with fiscal policies that put the brakes on, but instead use fiscal policy to drive things forward.
Fiscal policy can’t solve all the problems. There are structural issues that need to be addressed. In some countries it’s regulatory. In some countries it’s labor markets. In some countries it’s financial reform.
Those structural issues need to be addressed. But fiscal and monetary policy are important tools. When used together, they’re powerful. And that’s the message we bring.
That, combined with sharing information about exchange rates, having a clear understanding that it is unacceptable to target exchange rates to gain unfair advantage outside of your country, that’s a beggar-thy-neighbor strategy.
That just is a question of who gets more of the existing pie. It doesn’t grow the pie. And I think that as I talk to my counterparts, they understand that that is — they want to be clear that that’s not a direction that we, the world community, can go in.
I’m hoping that this G20 reinforces that. You know, there’s a lot of speculation in the world that these conversations could lead to different kinds of decisions on that. It’s underscoring that that is an important principle.
I think it’s pretty important.
WESTIN: we hear economists talk about it, and business leaders say the problem we have to some extent is really a demand problem at this point.
What could be done? Do you hope this communique or the agreement coming out of G20 actually does have specifics about how global demand could be stimulated?
LEW: So, you know, I think if you look at these agreements, they are general principles that apply in different countries in different ways. And there is always a lot of discussion about the words because no country wants to sign on to general words that it knows it will be behaving inconsistently with.
So getting those principles right, getting a little bit more meat on the bones makes a difference. I can’t get ahead of the process. We’re still going back and forth before we even meet on some of these issues.
I don’t think this is a moment in time when you’re going to see individual countries make the kinds of specific commitments that have been made in some other contexts that have been marked by real crisis.
This is not a moment of crisis. This is a moment where there — you know, you’ve got real economies doing better than markets think, you know, in some cases. You have a future that could be influenced very much by the kinds of policies that I’m describing.
And the idea is how do you avoid having things go to a place that you don’t want them to go. That’s a different conversation than what do you do when you’re in the middle of a full-blown crisis.
The only time you see the kinds of communiques with that kind of detail is once you’ve gotten beyond the point.
So I’m hopeful that the kind of conversation that I’m describing actually moves the dial. Let me put it this way. If the conversation were to go the other way, and you were to see some reticence to make the commitment to refrain from competitive devaluation and not take it a little bit of a step further, that would be a cause of real concern.
Because right now it’s a moment in time where if one country were to move in that direction, there’s a triggering effect of knock-on policies. And that would be a very bad for the global economy.
It wouldn’t grow the economy for sure. And I think it could lead to very negative ramifications both economically and geopolitically.
So I think this is actually an important moment. And these kinds of principles really matter. There’s no substitute for seeing your counterparts face-to-face and talking to them.
WESTIN: And the world will be watching to some extent.
WESTIN: Particularly markets will be watching.
WESTIN: Economic actors — investors will be watching. Are you concerned that expectations may be too high about what the G20 can deliver as a practical matter when it comes to growth?
LEW: Well, obviously my response in a bit is sending a clear message, don’t expect a crisis response in a non-crisis environment.
You know, it’s not the job of finance ministers and central bank governors to accelerate a crisis. It’s our job to try and avoid a crisis. If you’re in a crisis, you do different things. Obviously the meetings after the financial crisis, during the recession had a different character to them.
You know, I have, in my conversations with counterparts, gotten a strong sense that there is serious attention being given to how to address the issues that we’re discussing. And I think together by having this kind of conversation, we can lead to better outcomes.
Does that mean that coming out of this you’ll have point estimates of what each country is going to do and how? You rarely get that out of a meeting like this. So I think that would not be the kind of expectation to have.
But I don’t think it’s unreasonable to have the expectations that coming out of this will be a more stable understanding of what the future may look like. And that is an important thing, because you look at the world’s reaction to the policy-making in China over the last two months, really, the last six months, since August.
It has underscored how communication of policy is critically important in order to have the market and other counterparts around the world know what you intend and what you can be expected to do.
I think that it’s not just a problem, a challenge in China. It’s obviously a problem as each of us undertakes policies, and these meetings are a chance to work through some of those issues.
LEW: I think that the interview that Governor Zhou gave last week was really quite important because it was the most detailed explanation of what is the thinking behind China’s exchange rate policy and many of their economic policies right now.
I think, as you know, and as we know, you don’t communicate once. You have to communicate over and over and over again. You know, so there’s — policy-makers around the world probably all get frustrated that you don’t just get to say it once, you have to say it at meetings like the G20. You have to say it after meetings like the G20.
I think that the challenges that China’s economy is facing are, you know, really quite significant. But I think that they’re being interpreted in a way that is unduly negative. China is in a transition. It’s a hard transition.
It’s a transition from an industrial export-based model, a planned economy, to a more consumer-driven, more market-driven economy. That’s hard. It’s disruptive. It’s at a time when you have cross-currents in exchange rate pressures that are hard to navigate.
And it makes it all the more important to be clear about what you’re trying to do to communicate it. And the policies that they took when they explained them in August, and as they explained them now after the beginning of the year, I think do provide more of a basis for some of that anxiety to go down.
If it’s not well understood, there’s a tendency to assume the worst, that the bottom may be falling out. And that’s not good for any economy, certainly not a very large economy.
WESTIN: As you say, there have been some adjustments. At this point do you believe the RMB is undervalued still?
LEW: Look, I think that the RMB has to go up and down with markets. When there is pressure to appreciate, it has to be appreciating. When there’s pressure to depreciation, we can’t complain if it depreciates.
You know, when you say overvalued/undervalued, in a world where the dollar is not necessarily moving in the same direction as the kind of basket of other currencies that they look to for guidance, there’s not always a simple answer to that question.
It’s a hard path to navigate. But they have to show a willingness to go in both directions. You know, they’re trying, I think, to maintain balance, as I read Governor Zhou’s comments, in a world where there are competing things that they are trying to stay balanced to.
And it’s without a hard peg. And that means that the burden on them is to communicate very clearly because if they move in the opposite direction of market forces, it gives rise to speculation as to what’s going on.
So I think that it is — we’ve seen, you know, appreciation — a period over the last two years, appreciation against other currencies, depreciation against the dollar. Then they leveled off against the dollar to stop appreciating against other currencies.
And they haven’t announced what they were doing as they were doing it, which made it very hard for anyone to really understand what they were trying to accomplish.
As I look at the pattern over the last two years, you know, it seems to support the story that Governor Zhou is telling. But, you know, I think this is a question of going forward being clear, and refraining from the kinds of interventions that are unfair.
I would just point out that the intervention they’ve been doing lately has actually been to appreciate against the dollar, not to depreciate against the dollar. And that’s the opposite of what we used to complain about.
WESTIN: Is it harder or easier to have these discussions in China?
LEW: You know, I think it’s very important to China to be the host of the G20. I think it’s part of them stepping to the table and accepting responsibility as well as the benefits that go with being a major economy.
And I think that that’s something is very much a part of how they think about managing this, because they don’t just get to stand back. They’ve got to be, you know, kind of one of the laboring oars (ph).
And I think it’s a good thing if China takes more responsibility and holds itself accountable to rules that we abide by.
Obviously the future will require continued diligence on that, because these economic decisions are a mixture of economic and political decisions.
And we’re looking at some exciting ways to tell more of the American story on our currency.
So I said over the summer that we were going to continue to honor Alexander Hamilton. So I wasn’t surprised. I’ve always been a big fan of Alexander Hamilton.
WESTIN: Have you seen “Hamilton”?
LEW: I have. I have.
WESTIN: And you loved it, right?
LEW: It’s an extraordinary play. Look, he left an incomparable legacy in terms of our financial and political system. So he deserves the attention and credit he’s getting.
So people, you know, should never have been worried that we were going to do anything that would be to erase that memory. But we’re going to do some things that are interesting and pretty soon we’ll have something to announce.