ECONOMYNEXT – Vietnam’s central bank has promised the US Treasury not to devalue the Dong while insisting that the monetary policy was aimed at domestic stability though the America has extracted a promise to allow “to improve exchange rate flexibility over time.”
A dreaded ‘modernization’ of monetary policy also looms, perhaps backed by the International Monetary Fund, which has been peddling flexible policy, that could bring Vietnam down in the future when the US tightens monetary policy.
In 2020 the US Treasury falsely accused the State Bank of Vietnam of ‘currency manipulation’ Mercantilist-speak to indicate country was ‘undervaluing’ the Dong to push exports.
The false Treasury label was promptly amplified by the hurrah boys of the Western financial press, though it was withdrawn in 2021.
The Vietnam Dong has been stable since 2010, when it collapsed followings stimulus in the wake of the burst US housing bubble, though the SBV jacked up rates and intervened to try and stop it, creating domestic downturn in the process including in property.
Stable dong is for domestic stability not trade
“The SBV underscores that the focus of its monetary policy framework is to promote macroeconomic stability and to control inflation,” a joint statement issued after meeting a between SBV Governor Nguyen Thi Hong and Treasury Secretary Janet Yellen said.
“Vietnam confirms that it is bound under the Articles of Agreement of the IMF to avoid manipulating its exchange rate in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage and will refrain from any competitive devaluation of the Vietnamese dong.”
In April 2021 the US lifted the false currency manipulator label on Dong and also the Swiss Franc. (U.S. Drops Switzerland, Vietnam Currency-Manipulator Labels)
The false labeling of the Swissie, one of the strongest currencies in the world, amused classical economists.
“The absurdity of putting the Swiss franc and the dong in the same basket brings back memories of May 1, 2002,” he US economist Steve Hanke wrote in December 2020.
“That’s when I appeared before the Senate Banking Committee, along with then-Treasury secretary Paul O’Neill, to testify on exchange rates and the Treasury’s “Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States.”
“I was highly critical of both the entire concept and the particular methods used to label a country as a currency manipulator. I indicated that the U.S. Treasury’s report was little more than an invitation for political mischief that would interfere with free trade.
“In short, I thought, and think, that the entire semi-annual currency-manipulator ritual is rubbish and should be trashed.”
Shortly before the US false charge, the International Monetary Fund had had also claimed that the Dong was ‘undervalued’ though its real effective exchange index of over 130 , citing a methodology using the country’s current account surplus.
Vietnam has a current account surplus partly due to dollar inflows sterilization and forex reserve collection by the SBV and partly due to Vietnam firms investing in neighboring countries such as Cambodia and Laos backed by the strong Dong.
Vietnam billionaires have also been buying up assets in the US.
Governor Hong also stuck to her guns insisting that no Dong ‘undervaluation’ was going on.
“The State Bank of Vietnam will continue to manage exchange rate policy within its general monetary policy framework to safeguard the proper functioning of the monetary and foreign exchange markets, to promote macroeconomic stability and to control inflation, not to create an unfair competitive advantage in international trade,” Governor Hong insisted in the joint statement.
Over several years the IMF has tried to push the Vietnam to a ‘flexible exchange rate’ with ‘flexible inflation targeting’, a deadly discretionary policy framework that has destroyed countries like Sri Lanka and neighboring Laos.
Ahead of the US Treasury false charge in 2020 the IMF had also fuelled false propaganda against Dong stability claiming it was undervalued despite the Real Effective Exchange Rate Index being over 130.
The US had previously pushed Japan to appreciate its currency, with Mercantilists at the Treasury hoping it would reduce the trade deficit.
Though the Yen was pushed up from 360 at the break-up of the Bretton Woods to around 110 now, the trade deficit with the US has remained.
Mercantilists fail to understand that America’s foreign financed deficit spending and inward foreign direct investment is the reason for trade deficits.
Dreaded ‘modernization’ of monetary policy
The US Treasury however had extracted a promise from Vietnam to allow ‘greater exchange rate flexibility’ and modernize its monetary policy framework, which could indicate ‘flexible inflation targeting’ or un-anchored monetary policy.
A ‘flexible’ exchange rate lowers or destroys the credibility of the peg, triggering capital flight and also panic among importers, while exporters hold back. The IMF – backed permanently depreciating ‘flexible exchange rate’ put around 4 billion US dollars of capital in rupee bonds to flight.
“The SBV is also making ongoing efforts to further modernize and make more transparent its monetary policy and exchange rate framework,” the joint statement said.
“In support of these efforts, the SBV will continue to improve exchange rate flexibility over time, allowing the Vietnamese dong to move in line with the stage of development of the financial and foreign exchange markets and with economic fundamentals, while maintaining macroeconomic and financial market stability.”
Modernization of monetary policy is Sri Lanka with a flexible exchange rate and flexible inflation targeting, or un-anchored monetary policy had brought multiple currency crises and the Indian Ocean is now close to sovereign default.
The IMF gave technical support to calculate an output gap, a type of monetary stimulus that brought down the Bretton Woods system of soft-peg and ended a centuries old gold standard that had been kept with floating two ways discount rates by many central banks for nearly three centuries.
Vietnam also maintains its peg to the US dollar with a wide policy corridor and two way simultaneous repo and reverse repo auctions.
However Mercantilists who study at Keynesian cannot grasp the concept that exchange rates are determined by the monetary anchor in use and has nothing to do with the broader economy. Keynes himself cheered as the Sterling floated and went off the gold standard in 1931.
“Stability of foreign exchange rates was in their eyes a mischief, not a blessing,” explained Ludwig von Mises, a classical economist.
“Such is the essence of the monetary teachings of Lord Keynes. The Keynesian school passionately advocates instability of foreign exchange rates.”
True to form the joint statement claimed that the Vietnam dong should “move in line with the stage of development of the financial and foreign exchange markets and with economic fundamentals,” implying that real economy factors – read current account surplus – and not the monetary anchor determines an exchange rate.
The Sri Lanka went through severe ‘flexible exchange rate’ episodes in 2018 and early 2020, earning downgrades in both cases.
Rating agencies have said the stability of the Dong was a key criteria for growth and foreign direct investment.
Sri Lanka is now trying maintain a stable exchange rate but has no monetary policy to back it unlike Vietnam.
Sri Lanka is printing money (inflating the monetary base), which is the opposite of inflow sterilization. (Colombo/July23/2021)