THE FINANCIER

Since 1978, there have been morethan 50 acknowledged interventions by central banks and national governments into foreign exchange markets. This doesn’t even include what have likely been dozens of stealth attempts to alter the direction of currency values. National governments can, and will, continue to conduct foreign economic policy to address global economic imbalances despite such intervention’s poor track record of success. While some past attempts at currency intervention did indeed provide a temporary salve to the economic wounds caused by sharp changes in currency values, on a longer-term basis intervention holds forth the false promise of success.

If the U.S. dollar continues to appreciate, expect elements within the tech, auto, manufacturing and agricultural sectors to pressure Congress and the administration to put in place protectionist measures or engage in coordinated global macroeconomic policy to push the dollar, euro and yen toward politically identified equilibrium levels. However, it is important to understand that a stronger or weaker currency is the outcome of what are typically fundamental economic changes, shifts in comparative advantage or supply shocks. In the medium- to long-term, the inability of well-intentioned central bankers and policymakers to precisely identify equilibrium exchange rates will only disappoint and distort financial markets and the allocation of capital throughout the global economy.  

The major currency interventions during the past 30 years were the 1985 Plaza and 1987 Louvre accords. Both were attempts to address global economic imbalances between the then G-5, the United States, France, Germany, Japan and the U.K. Addressing global economic imbalances today is far more complicated because of the sovereign debt crisis in the eurozone, the three-decade fight against deflation in Japan and the rapidly mounting economic challenges in China.

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1985 Plaza Accord

The 1985 Plaza Accord was an attempt by the then G-5 to engage in a coordinated devaluation of the U.S. dollar against the Japanese yen and German deutschemark to address trade imbalances after a nearly 50 percent appreciation against major trading currencies during a five-year span. The imbalances were primarily related to the opportunistic disinflationary policy of the U.S. Federal Reserve, which was then led by Paul Volcker. Beyond competitiveness issues, the accord was sold to the public and investors as an attempt to reduce the U.S. current account deficit, which stood at 3.1 percent of GDP in late 1985, and to help boost domestic economic prospects.

The impact of the accord was mixed. The pre-announced and orderly intervention of foreign central banks in selling the dollar resulted in a depreciation of 52 percent against the yen and 45.7 percent against a trade basket of Western European currencies that approximates the current euro. Ironically, that depreciation did little to put a dent in the trade deficit with Japan, though it did reduce the net deficit against the Western European economies. The failure of the Plaza Accord was a result of structural impediments in Japan, differences in monetary policy and a long decline in the quality of U.S. manufactured goods.

1987 Louvre Accord

The February 1987 Louvre Accord was an attempt to coordinate the fiscal and monetary policies of the G-7, minus Italy who chose not to sign the agreement. The purpose was to arrest the depreciation of the U.S. dollar following the Plaza Accord. Essentially, the United States agreed to reduce public expenditures amid a low-interest rate policy while the Germans and Japanese agreed to adopt expansionary policies with low rates, including a tax cut in Germany and a reduction of trade surpluses in Japan. Secondarily, the G-7 introduced a reference range for currency values relative to the dollar that would result in FX policy coordination if the U.S. dollar appreciated/depreciated by more than 5 percent.

While the coordinated macroeconomic policies by the major global economies carried much promise at the time, it collapsed fairly quickly as the German Bundesbank chose to increase their short-term interest rate in October 1987, which resulted in an increase of the U.S discount rate by the Fed that subsequently triggered an increase in long-term Treasury yields, a sharp decline in equity prices in the U.S. and a 17.5 percent depreciation of the greenback against the yen. The U.K and Japanese would soon increase interest rates, and by early 1989 any chance of the Louvre Accord surviving dissipated when the Germans increased taxes.

Global Imbalances

Today calls for currency intervention are rising. As in 1987, any currency intervention would likely be organized around a coordination of monetary and fiscal policies among the major economies to address global imbalances. These imbalances are best illustrated by the current account surpluses and deficits of those economies. The U.S. currently runs a deficit of 2.21 percent of GDP in contrast with the 2.23 percent surplus in the eurozone, the 7.33 percent surplus in Germany, 2.1 percent Chinese surplus and the .54 percent surplus in Japan.  

The challenge for those that want the United States to organize a coordinated intervention is that the interests of the major economies are not aligned. Right now, the economic crisis in the eurozone and rapid deceleration of economic activity in China would dictate further deprecation of their currencies and growth in current account surpluses that may be used to plug holes in domestic demand. At this point the major economies are counting on U.S. growth to pull the global locomotive out of the ditch. Thus, any currency intervention to arrest the appreciation of the greenback remains a low probability event.

There are loads of articles floating around about attributes that make great leaders great, but what makes a poor leader? We can all pick them out after the fact (hindsight is 20/20 after all), but what traits set these people apart even before they assume a leadership role?

I propose that any one or more of the following traits would be a red flag that a person might not be ready for a leadership position:

1. Lack of empathy.

I realise I just wrote a post about the importance of empathy as a leadership skill, but the lack of empathy is a key indicator of a poor leader. If the person cannot seem to put him or herself in another person’s shoes and see things from a different perspective, they will never be a truly great leader.

2. Fear of change.

Hey, change is scary for everyone, especially when it involves loads of money and/or people’s jobs. But leaders who cannot embrace change are destined to be left behind.

3. Too willing to compromise.

The ability to find a win/win situation is a gift for a leader, but anyone who is too quick to compromise his or her ideas or ideals is not going to be a benefit to the team. It’s a fine balance between understanding when to give in and when to stand your ground.

4. Too bossy.

It’s a common misconception that bossy people make good bosses. Actually, the opposite is true. Someone who simply orders others around is unlikely to engender any loyalty or make subordinates feel empowered. True leaders have followers who want to be led by them.

5. Wishy-washy.

Leaders must make decisions, and so if a person always seems to vacillate on choices big and small — from who should handle a certain client to where to go for lunch — they will probably have difficulty in a leadership position. It indicates a lack of self-confidence.

6. Poor judge of character.

A person who has a blind spot when it comes to friends and coworkers, making excuses or being unable to see another’s true character, won’t surround himself with the kinds of people who will help him rise to the top.

7. Out of balance.

Someone who is the first into the office every day and the last to leave might seem like a great candidate for promotion, but ask yourself if they have any balance in their lives. A lack of balance can be a precursor to burnout, and can also signal that they may have unreasonable expectations of the rest of the team.

8. Lack of humility.

The person who acts as though they can do it all — and are the only one who can do it right — is unlikely to rise to be a great leader, because they’ll be too busy doing everyone else’s job. Micro-managers need not apply.

This is not to say that having one of these characteristics automatically bars anyone from assuming a leadership position. In fact, I believe people can learn to overcome any of these bad habits and become a better leader.