Deutsche Bank reports that Mr. McConnell has said that it is “pretty clear” that the sequester will go ahead. I have to admit that I do not have a good model for what is going to happen here. What is going on is that the monomaniacal “starve the beast” tendency of the Republican party is in tension with more rational elements; but the more rational elements promised the monomaniac wing significant deficit reduction over the next ten years in return for raising the debt ceiling, and both sides are cross about having had to vote, effectively, for a tax increase at the start of the year. It is hard to know whether a) the rational side in fact wants to moderate the sequester and is using the loonies as a negotiating tactic, or b) the rational side has decided to allow the sequester to happen to shore up its leadership, calculating that it will be able to place the blame for the resulting economic damage on Mr. Obama. Rather, since both of these are probably going on in the minds of Republican leaders, it is hard to know which is the right model of Republican objectives to feed into a model of sequester negotiations.
What to make of the G7 statement on currencies (see here: http://bit.ly/Udvgee)? The market seems to have been confused, because different sources have issued different interpretations about whether or not it is a criticism of Japan. In circumstances like this, the first thing I like to do is to see what the statement actually says.
I see the statement as balanced. In part, it is a rejection of statements by certain Japanese officials on the subject of the yen. In part, however, it is also an assertion that Japan’s monetary and fiscal policies, as they presently stand, are focused on domestic conditions and that there is therefore no reason for them to change.
The G7 appears to be responding to the ridiculous “currency war” meme (which, according to Google, has been waxing of late, although it has not approached the level of its 2010 peak: http://bit.ly/UdAfLO). The statement seems best read as saying: there isn’t a currency war, we are not targeting currencies, but we will continue with attempts to manage our domestic economies with various policy instruments just as we have been doing. So I think there is tacit approval for Japan’s policies in the statement.