ECONOMYNEXT – The Vietnamese central bank has pledged the US Treasury not to devalue the Dong, insisting that monetary policy is aimed at domestic stability, although America has extracted a pledge to allow “to improve the flexibility of the rate exchange rate over time “.
A feared “modernization” of monetary policy is also looming, perhaps backed by the International Monetary Fund, which has peddled flexible policy, which could bring Vietnam down in the future when the United States tightens monetary policy.
In 2020, the US Treasury falsely accused the State Bank of Vietnam of “currency manipulation” according to mercantilist rhetoric to indicate that the country was “undervaluing” the Dong to push exports.
The false Treasury label was quickly amplified by cheers in the Western financial press, although the Biden administration withdrew it this year.
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The Vietnamese Dong has been stable since 2010 when it collapsed following the bursting of the housing bubble in the United States, although the SBV has raised rates and intervened to try to stop it, thus creating a national slowdown, including in real estate.
The stable dong is for inner stability and not for trading
“The SBV stresses that the objective of its monetary policy framework is to promote macroeconomic stability and control inflation,” said a joint statement released after a meeting between SBV Governor Nguyen Thi Hong and Treasury Secretary Janet Yellen.
“Vietnam confirms its obligation under the IMF Articles of Agreement to avoid manipulating its exchange rate in order to prevent an effective balance of payments adjustment or to gain an unfair competitive advantage and will refrain of any competitive devaluation of the Vietnamese dong. “
In April 2021, the United States lifted the bogus currency manipulator label which also included the Swiss franc. (US drops currency manipulation labels for Switzerland and Vietnam)
The false labeling of Swissie, one of the strongest currencies in the world, has amused many mainstream economists.
Previously, the International Monetary Fund had also wrongly claimed that the Dong was “undervalued” despite its real effective exchange rate index of over 120 percent, citing a current account surplus.
Vietnam has a current account surplus due in part to sterilization of dollar inflows and collection of foreign exchange reserves by the SBV and in part to investments by Vietnamese companies in neighboring countries such as Cambodia and Laos, supported by Fort Dong.
Vietnamese billionaires have also bought assets in the United States.
Last year, the Vietnamese president told Donald Trump that the strong dong was not maintained for a trade advantage but for domestic stability.
Governor Hong also stood firm by insisting that no “undervaluation” was underway.
“The State Bank of Vietnam will continue to manage the exchange rate policy as part of its general monetary policy in order to preserve 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 markets. trade, ”Governor Hong insisted in the joint statement.
The IMF has attempted to push Vietnam towards a “flexible exchange rate” with flexible multi-year inflation targeting, a deadly discretionary policy framework that has destroyed countries like Sri Lanka and neighboring Laos.
The IMF had fueled false propaganda against the stability of the Dong, claiming it was undervalued while the real effective exchange rate index was above 130.
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The United States had previously pushed Japan to appreciate its currency, with Treasury mercantilists hoping this would reduce the trade deficit.
Although the yen fell from 360 during the Bretton Woods burst to around 100 today, the trade deficit with the United States has remained.
Mercantilists fail to understand that deficit spending by the United States and foreign direct inward investment are the reason for trade deficits.
The dreaded “modernization” of monetary policy
The US Treasury extracted a pledge to allow “greater exchange rate flexibility” and modernize its monetary policy framework, which could indicate “flexible inflation targeting” or un-anchored monetary policy.
“The SBV is also making continuous efforts to further modernize and make more transparent its monetary policy and exchange rate framework,” the joint statement said.
“To support these efforts, the SBV will continue to improve the flexibility of the exchange rate over time, allowing the Vietnamese dong to adjust to the development stage of financial and foreign exchange markets and economic fundamentals, while maintaining the macroeconomic and financial market. stability.”
Modernizing monetary policy is Sri Lanka with a flexible exchange rate and flexible inflation targeting, or unanchored monetary policy has resulted in multiple currency crises and the Indian Ocean is now close to sovereign default.
The IMF provided technical support to calculate an output gap, a type of monetary stimulus that knocked the Bretton Woods system out of soft-peg and ended a centuries-old gold standard that had been maintained with discount rates floating back and forth by many central banks for nearly three centuries.
Vietnam also maintains its peg to the US dollar with a broad political corridor and simultaneous two-way reverse repo and reverse repo auctions.
However, mercantilists studying at Keynesian cannot comprehend the concept that exchange rates are determined by the monetary anchor used and have nothing to do with the economy at large. Keynes himself applauded as the British pound floated and rolled off the gold standard in 1931.
“Exchange rate stability was in their eyes an evil, not a blessing,” said Ludwig von Mises, a classical economist.
“This is the essence of Lord Keynes’ monetary teachings. The Keynesian school passionately advocates exchange rate instability.
True to form, the joint statement asserted that the Vietnamese dong should “evolve according to the stage of development of financial and currency markets and economic fundamentals”, implying that the factors of the real economy – read the current account surplus – not the monetary peg determines an exchange rate.
Sri Lanka went through severe episodes of “flexible exchange rates” in 2018 and early 2020, achieving downgrades in both cases.
Rating agencies have said the stability of the Dong is a key criterion for growth and foreign direct investment.
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Sri Lanka is now trying to maintain a stable exchange rate but does not have a monetary policy to support it unlike Vietnam. Sri Lanka prints money (inflates the monetary base), which is the opposite of influx sterilization. (Colombo / July 23/2021)