“Currency Wars”: The Inconvenient Truth
It is easy to come up with new buzz phrases, which become the darling of the media. The latest is “currency wars.” If you listen to any financial or economic news at all you will know that the IMF is meeting in Washington to try to calm the currency markets down. It seems everybody has learned that a weak currency can be a cheap way to gain employment on the domestic front. There is nothing like boosting exports to get people back to work.
For those of you who are thoroughly bored with the ins and outs of the currency market lets just put it this way. If you can make your currency cheaper you automatically make your exports more attractive to anybody else in this world. It’s an easy way to boost the economy and get people back to work. In Canada for many years we had a currency that was very weak compared to our American cousins. Many of us made a lot of money manufacturing goods sent to the United States and exporting goods onto the world market and being paid in US dollars. In fact an argument could be made that as the Canadian dollar has gone up in value the manufacturing sector in Ontario has grown weaker and weaker.
Its one thing to be said in ordinary times and it’s another to think about these currency wars in these extraordinary economic times. Of course what I’m talking about is the fragile global economy where you have some very tough economic problems in the United States and Western Europe and seemingly no easy way to make things better. For instance the United States still has a terrible unemployment problem and an uneven economy and a bad real estate market. One backs the other and it’s almost like the chicken and the egg theory. So what do you do to make things better with the least pain?
It’s pretty obvious in my opinion that the United States is monetizing their debt. In other words the Federal Reserve has a zero interest rate policy as it keeps purchasing bonds. The only problem is a zero interest rate policy doesn’t seem to be working; it doesn’t seem to be creating the employment boosts that governments would like to see. It of course is being exasperated by other governments around the world trying to devalue their currency to try to get others to buy their exports and it seems to be a never ending circle.
In 2010 there seems to be a bit of a difference this time when countries actively complain about each other and what they’re not doing with their currency. For instance countries like Brazil, India, Malaysia, and of course China don’t quite see things the way Western powers do like the United States and Western Europe. When you are a developing economy, why should you ask your people to sacrifice for other nations that seem to have it already? Not only that, but many of these countries have seen their economic might grow and don’t see a big reason to let that advantage down. China of course seems to be coming across as a villain.
China is in an interesting position. They hold vast quantities of US debt and are not particularly interested in the US dollar continuing to be devalued. Our American friends are heavily criticizing them. The Chinese premier Wen Jiabao has recently assured Europe that he would not only prop up the Chinese currency (Yuan) but he might even buy some Greek government debt. That last bit must mean he is certainly thinking about being charitable. For instance why would he do that other than just to be a good guy?
We will see what will happen. The Chinese currency is by default tied to the US currency because of the debt they hold. If the Chinese government lets the Yuan appreciate it may cause issues of layoffs in China’s industrial sector. That’s not good politically for the Communist Party. So it is not going to be easy.
So when it comes to currency wars, the problem is we seem to have almost every country in the world minus Canada and a few others trying to manipulate their currency à la cart. In other words, they know it will feel good if they manipulate it themselves. Who cares what the other guys feel. The only problem with that is it’s not good for the global economy because invariably it’ll cause problems one way or the other. Jealousies will be created, jobs will be lost at the expense of others and the global economy lies in the balance.
I really don’t know how this is going to end. With the big players like the United States and Western Europe very willing to manipulate the US dollar and the Euro, it doesn’t bode well for a happy ending. In 2010 we now have a very different economic world. There are more global players than there used to be. And of course to the Western powers the inconvenient truth they have opinions too.