In September, the world will commemorate the 30th anniversary of the Plaza Accord. That agreement to weaken the US dollar and boost the yen still stands as a landmark of economic cooperation - something that's sadly lacking in our chaotic and deflationary times.
This week's move by Singapore's central bank shows why it may be time for another round of currency talks. Thirteen days after the Swiss National Bank let the franc soar, the Monetary Authority of Singapore unexpectedly eased policy and allowed the Singapore dollar to weaken. The unilateral moves disrupted markets around the world, adding to the general climate of volatility.
While the two banks' moves may seem divergent, they are battling the same problem: fallout from too much liquidity zooming around the globe.
Thus far, the debate surrounding quantitative easing (QE) has focused on the risks to big economies - the United States, Japan and the euro zone. But actions by "the major advanced-economy central banks portend high levels of capital flow and currency volatility in global financial markets", says Cornell University's Professor Eswar Prasad, author of The Dollar Trap. "Emerging markets and small economies with open capital accounts, such as Singapore and Switzerland, are likely to feel whiplash effects from this volatility."
In the last year alone, about US$14 billion (S$19 billion) of overseas hot money poured into equity markets in Indonesia, Thailand and the Philippines. Taiwan's equity bourses have seen over US$5 billion of foreign buying. These flows could easily reverse as soon as the Federal Reserve begins hiking interest rates or Greece's troubles push the euro back into crisis.
That's making it devilishly hard for smaller nations to manage risks to their economies - and driving them to act before competitors do. The fact that highly conservative Singapore felt compelled to surprise the market is a sign of how worried officials there must be.
The problem is that as more and more nations slash rates in an attempt to keep their export-focused economies competitive, returns are diminishing. Eventually, nations trying to out-stimulate each other are, in central banker parlance, pushing on a string. QE programmes are already generating more financial-market side effects - including excessive volatility, bubbles and impossibly low bond yields - than actual growth.
This should worry the big economies as well. At a lunch in October 1998, the late Karl Otto Poehl, who as head of Germany's Bundesbank in 1985 was one of the Plaza Accord principals, offered a useful analogy involving wine grapes. Vineyards often surround vines with rose bushes, he explained, as an early-warning system. Since rose bushes are vulnerable to disease, wine makers know their grapes are in trouble long before disaster strikes. Small, open economies like Singapore and Switzerland serve a similar role for the global economy.
Asking countries to work together to head off a potential currency war will be a tough sell. Still, the need for greater coordination should be obvious. Central bankers could calm volatility by addressing deep fissures over exchange rates, budget- and current-account deficits and other imbalances. Signs of cooperativeness - and in particular a united approach to fighting deflation - would cheer global markets. Perhaps policymakers might even gin up out-of-the-box ideas, such as pegging the yen to the US dollar to battle deflation, or establishing a regional exchange-rate system in South-east Asia.
"Some sort of international coordination may be preferable at this point to a growing wave of competitive devaluations," says Professor Russell Green of Rice University's Baker Institute (named after Mr James Baker, who was US Treasury secretary at the time of the Plaza Accord).
In particular, Prof Green suggests, the International Monetary Fund "needs to step forward and establish some ground rules. Checking exchange rate competition is one of its major mandates, so it needs to provide the intellectual leadership that others can coalesce around".
Perhaps as a unit, the gathered central bankers could even shame governments into repairing economies. "The problem remains that central banks are being asked to do most of the heavy lifting in terms of propping up growth and prices, and monetary policy invariably has spillovers across national borders," says Prof Prasad. "What I wish for is a better mix of policies in major economies, with less reliance on monetary policy."