Currency war
Encyclopedia
International relations
International relations is the study of relationships between countries, including the roles of states, inter-governmental organizations , international nongovernmental organizations , non-governmental organizations and multinational corporations...
where countries compete against each other to achieve a relatively low exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
for their own currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
. As the price to buy a particular currency falls, so to does the real price of exports from the country. Imports become more expensive too, so domestic industry, and thus employment, receives a boost in demand both at home and abroad. However, the price increase in imports can harm citizens' purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...
. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.
Competitive devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
has been rare through most of history as countries have generally preferred to maintain a high value for their currency; have been content to allow its value to be set by the markets or have participated in systems of managed exchanges rates. An exception was the episode of currency war which occurred in the 1930s. The period is considered to have been an adverse situation for all concerned, with all participants suffering as unpredictable changes in exchange rates reduced international trade.
According to Guido Mantega
Guido Mantega
Guido Mantega is a Brazilian economist, politician and currently Brazil's Finance Minister. He graduated in Economics from the Faculdade de Economia, Administração e Contabilidade of the University of São Paulo and is a professor of Economics at several leading universities of São Paulo.He has...
, the Brazilian Minister for Finance, a global currency war broke out in 2010. This view was echoed by numerous other financial journalists and government officials from around the world. Other senior policy makers and journalists have suggested the phrase "currency war" overstates the extent of hostility, though they agree that a risk of further escalation exists.
States engaging in competitive devaluation since 2010 have used a mix of policy tools, including direct government intervention, the imposition of capital controls, and, indirectly, quantitative easing
Quantitative easing
Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
. While many countries have experienced undesirable upward pressure on their exchange rates and taken part in the on-going arguments, the most notable dimension has been the rhetorical conflict between the United States and China over the valuation of the yuan
Chinese yuan
The yuan is the base unit of a number of modern Chinese currencies. The yuan is the primary unit of account of the Renminbi.A yuán is also known colloquially as a kuài . One yuán is divided into 10 jiǎo or colloquially máo...
. The episode which began in the early 21st century is being pursued by different mechanisms than was the case in the 1930s, and opinions among economists have been divided as to whether it will have a net negative effect on the global economy. By April 2011 journalists had began to report that the currency war had subsided; though Guido Mantega has continued to assert that the conflict is still on-going.
Reasons for intentional devaluation
Richard N. Cooper
Richard Newell Cooper is an American economist, policy adviser, and academic.Cooper graduated from Oberlin College in 1956 and received a master's degree in economics from the London School of Economics and Political Science as a Marshall Scholar in 1958. He received his Ph.D...
, writing in 1971, a substantial devaluation is one of the most "traumatic" policies a government can adopt – it almost always results in cries of outrage and calls for the government to be replaced. Devaluation can lead to a reduction in citizens' standard of living
Standard of living
Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
as their purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...
is reduced both when they buy imports and when they travel abroad. It also can add to inflationary pressure
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. Devaluation can make interest payments on international debt more expensive if those debts are denominated in a foreign currency, and it can discourage foreign investors. At least until the 21st century, a strong currency was commonly seen as a mark of prestige while devaluation was associated with weak governments.
However, when a country is suffering from high unemployment or wishes to pursue a policy of export led growth, a lower exchange rate can be seen as advantageous. From the early 1980s the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) has proposed devaluation as a potential solution for developing nations that are consistently spending more on imports than they earn on exports. A lower value for the home currency will raise the price for imports while making exports cheaper. This tends to encourage more domestic production, which raises employment and gross domestic product
Gross domestic product
Gross domestic product refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living....
(GDP) – though the effect may not be immediate due to the Marshall–Lerner condition. Devaluation can be seen as an attractive solution to unemployment when other options, like increased public spending, are ruled out due to high public debt, or when a country has a balance of payments deficit which a devaluation would help correct. A reason for preferring devaluation common among emerging economies is that maintaining a relatively low exchange rate helps them build up their foreign exchange reserves, which can protect them against future financial crises.
Mechanism for devaluation
A state wishing to devalue, or at least check the appreciation of its currency, must work within the constraints of the prevailing International monetary system. During the 1930s, countries had relatively more direct control over their exchange rates through the actions of their central banks. Following the collapse of the Bretton Woods systemBretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
in the early 1970s, markets substantially increased in influence, with market forces largely setting the exchange rates for an increasing number of countries. However, a state's central bank can still intervene in the markets to effect a devaluation – if it sells its own currency to buy other currencies then this will cause the value of its own currency to fall – a practice common with states that have a managed exchange rate regime. Less directly, quantitative easing (common in 2009 and 2010), tends to lead to a fall in the value of the currency even if the central bank does not directly buy any foreign assets.
A third method is for authorities simply to talk down the value of their currency by hinting at future action to discourage speculators from betting on a future rise, though sometimes this has little discernible effect. Finally, a central bank can effect a devaluation by lowering its base rate of interest, however this sometimes has limited effect, and, since the end of World War II, most central banks have set their base rate according to the needs of their domestic economy.
If a country's authorities wish to devalue or prevent appreciation against market forces exerting upwards pressure on the currency, and retain control of interest rates, as is usually the case, they will need capital controls in place—due to conditions that arise from the impossible trinity trilemma
Impossible trinity
The Impossible Trinity is a trilemma in international economics suggesting it is impossible to have all three of the following at the same time:...
.
Quantitative easing
Quantitative easingQuantitative easing
Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy...
(QE) is the practice where a central bank tries to mitigate a potential or actual recession by increasing the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
for their home economy. This can be done by creating money and injecting it into the domestic economy with open market operations. There may be a promise to destroy any newly created money once the economy improves, so as to avoid inflation.
Quantitative easing was widely used as a response to the financial crises that began in 2007, especially by the United States and the United Kingdom, and, to a lesser extent, the Eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
.
The Bank of Japan was the first central bank to claim to have used such a policy.
Although the US administration has denied that devaluing their currency was part of their objectives for implementing quantitative easing, the practice can act to devalue a country's currency in two indirect ways. Firstly, it can encourage speculators to bet that the currency will decline in value. Secondly, the large increase in the domestic money supply will lower domestic interest rates, often they will become much lower than interest rates in countries not practising quantitative easing. This creates the conditions for a carry trade, where market participants can engage in a form of arbitrage, borrowing in the currency of the country practising quantitative easing, and lending in a country with a relatively high rate of interest. Because they are effectively selling the currency being used for quantitative easing on the international markets, this can increase the supply of the currency and hence push down its value. By October 2010 expectations in the markets were high that the US, UK and Japan would soon embark on a second round of QE, with the prospects for the Eurozone to join them less certain.
In early November 2010 the US launched QE2 — the expected second round of quantitative easing. The Federal Reserve made an additional USD$600 billion available for the purchase of financial assets. This prompted widespread criticism, especially from China, Germany and Brazil, that the US was using QE2 to try to devalue its currency without consideration to the effect the resulting capital inflows might have on emerging economies.
Some leading figures from the critical countries, such as Zhou Xiaochuan
Zhou Xiaochuan
Zhou Xiaochuan is a Chinese economist, banker, reformist and bureaucrat. As governor of the People's Bank of China since December 2002, he has been in charge of the monetary policy of the People's Republic of China....
, governor of the People's Bank of China
People's Bank of China
The People's Bank of China is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China...
, have said the QE2 is understandable given the challenges facing the US. Wang Jun, the Chinese vice-Finance Minister suggested QE2 could "help the revival of the global economy tremendously."
Barrack Obama, President of the US, has defended QE2, saying it would help the US economy to grow, which would be "good for the world as a whole".
Japan also launched a second round of quantitative easing though to a lesser extent than the US; Britain and the Eurozone did not launch any additional QE in 2010.
International conditions required for currency war
For a widespread currency war to occur a large proportion of significant economies must wish to devalue their currencies at once. This has so far only happened during a global economic downturn.An individual currency devaluation has to involve a corresponding rise in value for at least one other currency. The corresponding rise will generally be spread across all other currencies and so unless the devaluing country has a huge economy and is substantially devaluing, the offsetting rise for any individual currency will tend to be small or even negligible. In normal times other countries are often content to accept a small rise in the value of their own currency or at worst be indifferent to it. However if much of the world is suffering from a recession, from low growth or are pursuing strategies which depends on a favourable balance of payments, then nations can begin competing with each other to devalue. In such conditions, once a small number of countries begin intervening this can trigger corresponding interventions from others as they strive to prevent further deterioration in their export competitiveness.
Up to 1930
For centuries, governments have slowly devalued their currencies by reducing its intrinsic valueCommodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
. Methods have included reducing the percentage of gold in coins or substituting less precious metals for gold. However until the 19th century, the proportion of the world's trade that occurred between nations was very low, so exchanges rates were not generally a matter of great concern. Rather than being seen as a means to help exporters, the debasement of currency was motivated by a desire to increase the domestic money supply and the ruling authorities' wealth through seigniorage
Seigniorage
Seigniorage can have the following two meanings:* Seigniorage derived from specie—metal coins, is a tax, added to the total price of a coin , that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.* Seigniorage derived from notes is more...
, especially when they needed to finance wars or pay debts. A notable example is the substantial devaluations which occurred during the Napoleonic wars
Napoleonic Wars
The Napoleonic Wars were a series of wars declared against Napoleon's French Empire by opposing coalitions that ran from 1803 to 1815. As a continuation of the wars sparked by the French Revolution of 1789, they revolutionised European armies and played out on an unprecedented scale, mainly due to...
. When nations wished to compete economically they typically practiced mercantilism
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
– this still involved attempts to boost exports while limiting imports, but rarely by means of devaluation. A favoured method was to protect home industries
Protectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
using current account
Current account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
controls such as tariffs. From the late 18th century, and especially in Great Britain which for much of the 19th century was the world's largest economy, mercantilism became increasingly discredited by the rival theory of free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
, which held that the best way to encourage prosperity would be to allow trade to occur free of government imposed controls. The intrinsic value of money became formalised with a gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
being widely adopted from about 1870–1914, so while the global economy was now becoming sufficiently integrated for competitive devaluation to occur there was little opportunity. Following the end of WWI, many countries other than the US experienced recession and few immediately returned to the gold standard, so several of the conditions for a currency war were in place. However currency war did not occur as Great Britain was trying to raise the value of her currency back to its pre-war levels, effectively cooperating with the countries that wished to devalue against the market.
By the mid 1920s many former members of the gold standard had rejoined, and while the standard did not work as successfully at it had pre war, there was no widespread competitive devaluation.
Currency War in the Great Depression
During the Great DepressionGreat Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s, most countries abandoned the gold standard, resulting in currencies that no longer had intrinsic value. With widespread high unemployment, devaluations became common. Effectively, nations were competing to export unemployment, a policy that has frequently been described as "beggar thy neighbour
Beggar thy neighbour
In economics, a beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.- Original application :...
".
However, because the effects of a devaluation would soon be counteracted by a corresponding devaluation by trading partners, few nations would gain an enduring advantage. On the other hand, the fluctuations in exchange rates were often harmful for international traders, and global trade declined sharply as a result, hurting all economies.
The exact starting date of the 1930s currency war is open to debate. The three principal parties were Great Britain, France, and the United States. For most of the 1920s the three generally had coinciding interests, both the US and France supported Britain's efforts to raise Sterling's value against market forces. Collaboration was aided by strong personal friendships among the nations' central bankers, especially between Britain's Montagu Norman and America's Benjamin Strong
Benjamin Strong, Jr.
Benjamin Strong, Jr. was an American banker. He served as Governor of the Federal Reserve Bank of New York for 14 years until his death...
until the latter's early death in 1928. Soon after the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...
, France lost faith in Sterling as a source of value and begun selling it heavily on the markets. From Britain's perspective both France and the US were no longer playing by the rules of the gold standard. Instead of allowing gold inflows to increase their money supplies (which would have expanded those economies but reduced their trade surpluses) France and the US began sterilising the inflows, building up hoards of gold. These factors contributed to the Sterling crises of 1931; in September of that year Great Britain substantially devalued and took the pound off the gold standard. For several years after this global trade was disrupted by competitive devaluation. The currency war of the 1930s is generally considered to have ended with the Tripartite monetary agreement of 1936
Tripartite Agreement of 1936
The Tripartite Agreement was an international monetary agreement entered into by the United States, France, and Great Britain in September 1936 to stabilize their nations' currencies both at home and in the exchange.-History:...
.
Bretton Woods era
From the end of World War II until about 1971, the Bretton Woods systemBretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
of semi-fixed exchange rates meant that competitive devaluation was not an option, which was one of the design objectives of the systems' architects. Additionally, global growth was generally very high in this period, so there was little incentive for currency war even if it had been possible.
1973 to 2000
While some of the conditions to allow a currency war were in place at various points throughout this period, countries generally had contrasting priorities and at no point were there enough states simultaneously wanting to devalue to for a currency war to break out. On several occasions countries were desperately attempting not to cause a devaluation but to prevent one. In these instances states were striving not against other countries but against market forces that were exerting undesirable downwards pressure on their currencies. Examples include Great Britain during Black WednesdayBlack Wednesday
In politics and economics, Black Wednesday refers to the events of 16 September 1992 when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism after they were unable to keep it above its agreed lower limit...
and various tiger economies during the Asian crises of 1997. During the mid 1980s the US did desire to devalue significantly, but they were able to secure the cooperation of other major economies with the Plaza accord agreement
Plaza Accord
The Plaza Accord or Plaza Agreement was an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets...
. As free market influences approached their zenith during the 1990s advanced economies and increasingly transition and even emerging economies moved to the view that it was best to leave the running of their economies to the markets and not to intervene even to correct a substantial current account deficit.
2000 to 2008
During the 1997 Asian crisis several Asian economies ran critically low on foreign reserves, leaving them forced to accept harsh terms from the IMF and, often, to accept low prices for the forced sale of their assets. This shattered faith in free market thinking among emerging economies, and from about 2000 they generally began intervening to keep the value of their currencies low. This enhanced their ability to pursue export led growth strategies while at the same time building up foreign reserves so they would be better protected against further crises. No currency war resulted because on the whole advanced economies accepted this strategy—in the short term it had some benefits for their citizens who could buy cheap imports and thus enjoy a higher material standard of living. The current accountCurrent account
In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade , net factor income and net transfer payments .The current account balance is one of two major...
deficit of the US grew substantially but, until about 2007, the consensus view among free market economists and policy makers like Alan Greenspan
Alan Greenspan
Alan Greenspan is an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006. He currently works as a private advisor and provides consulting for firms through his company, Greenspan Associates LLC...
, then Chairman of the Federal Reserve, and Paul O'Neill, US Treasury secretary, was that the deficit was not a major reason for worry.
This is not say there was no popular concern; by 2005 for example a chorus of US executives along with trade union and mid-ranking government officials had been speaking out about what they perceived to be unfair trade practices by China.
These concerns were soon partially allayed. With global economy doing well, China was able to abandon her dollar peg in 2005, allowing a substantial appreciation of the Yuan up to 2007, while still increasing her exports. The dollar peg was re-established as the financial crises began to reduce China's export orders.
Economists such as Michael P. Dooley, Peter M. Garber, and David Folkerts-Landau described the new economic relationship between emerging economies and the US as Bretton Woods II
Bretton Woods II
The 2008 G-20 Washington Summit on Financial Markets and the World Economy took place on November 14–15, 2008, in Washington, D.C., United States. It achieved general agreement amongst the G-20 on how to cooperate in key areas so as to strengthen economic growth, deal with the financial...
.
Competitive devaluation after 2009
By 2009 some of the conditions required for a currency war had returned, with a severe economic downturn seeing global trade in that year decline by about 12%. There was a widespread concern among advanced economies concerning the size of their deficits; they increasingly joined emerging economies in viewing export led growth as their ideal strategy. In March 2009, even before international co-operation reached its peak with the 2009 G-20 London Summit2009 G-20 London summit
The 2009 G-20 London Summit is the second meeting of the G-20 heads of state in discussion of financial markets and the world economy, which was held in London on 2 April 2009 at the ExCeL Exhibition Centre. It followed the first G-20 Leaders Summit on Financial Markets and the World Economy, which...
Economist Ted Truman
Edwin M. Truman
Edwin M. Truman is an American economist specializing in international financial institutions, especially the International Monetary Fund and sovereign wealth funds. He has been a Senior Fellow with the Peterson Institute for International Economics since 2001. Truman has worked quietly over...
became one of the first to warn of the dangers of competitive devaluation breaking out. He also coined the phrase competitive non-appreciation.
On 27 September 2010, Brazilian Finance Minister Guido Mantega announced that the world is "in the midst of an international currency war."
Numerous financial journalists agreed with Mantega's view, such as the Financial Times Alan Beattie and The Telegraph's Ambrose Evans-Pritchard. Journalists linked Mantega's announcement to recent interventions by various countries seeking to devalue their exchange rate including China, Japan, Colombia, Israel and Switzerland.
Other analysts such as Goldman Sach's Jim O'Neill
Jim O'Neill (economist)
Jim O'Neill is presently the Chairman of Goldman Sachs Asset Management. He was previously head of global economic research and commodities and strategy research at Goldman Sachs. He is best known for his prominent economic thesis regarding the economically related nations referred to as BRICs...
asserted that fears of a currency war were exaggerated.
In September, senior policy makers such as Dominique Strauss-Kahn
Dominique Strauss-Kahn
Dominique Gaston André Strauss-Kahn , often referred to in the media, and by himself, as DSK, is a French economist, lawyer, politician, and member of the French Socialist Party...
, then Managing Director of the IMF, and Tim Geithner, US Secretary of the Treasury, were reported as saying the chances of a genuine currency war breaking out were low; however by early October, Strauss-Kahn was warning that the risk of a currency war was real. He also suggested the IMF could help resolve the trade imbalances which could be the underlying casus belli
Casus belli
is a Latin expression meaning the justification for acts of war. means "incident", "rupture" or indeed "case", while means bellic...
for conflicts over currency valuations. Mr Strauss-Kahn said that using currencies as weapons "is not a solution [and] it can even lead to a very bad situation. There’s no domestic solution to a global problem."
Considerable attention had been focused on the US, due to its quantitative easing programmes, and on China. For much of 2009 and 2010, China has been under pressure from the US to allow the yuan to appreciate. Between June and October 2010, China allowed a 2% appreciation of the yuan, but there are concerns from Western observers that China only relaxes her intervention when under heavy pressure. The fixed peg was not abandoned until just before the June G20 meeting, after which the yuan appreciated by about 1%, only to devalue slowly again, until further US pressure in September when it again appreciated relatively steeply, with the imminent September US Congressional hearings to discuss measures to force a revaluation.
Reuters
Reuters
Reuters is a news agency headquartered in New York City. Until 2008 the Reuters news agency formed part of a British independent company, Reuters Group plc, which was also a provider of financial market data...
suggested that both China and the United States were "winning" the currency war, holding down their currencies while pushing up the value of the Euro, the Yen, and the currencies of many emerging economies.
Martin Wolf
Martin Wolf
Martin Wolf, CBE is a British journalist, widely considered to be one of the world's most influential writers on economics. He is associate editor and chief economics commentator at the Financial Times.-Early life:...
, an economics leader writer with the Financial Times, has suggested there may be advantages in western economies taking a more confrontational approach against China, which in recent years has been by far the biggest practitioner of competitive devaluation. Though he suggests that rather than using protectionist measures that may spark a trade war, a better tactic would be to use targeted capital controls against China to prevent them buying foreign assets in order to further devalue the yuan, as previously suggested by Daniel Gros
Daniel Gros
Daniel Gros is currently the Director of the Centre for European Policy Studies , a European think tank. He worked for the CEPS from 1986 to 1988 and has worked there continuously since 1990...
, Director of the Centre for European Policy Studies
Centre for European Policy Studies
The Centre for European Policy Studies is a think tank based in Brussels, Belgium that undertakes research "leading to solutions to the challenges facing Europe today"...
.
A contrasting view was published on October 19, with a paper from Chinese economist Yiping Huang arguing that the US did not win the last "currency war" with Japan, and has even less of a chance against China; but should focus instead on broader "structural adjustments" at the November 2010 G-20 Seoul summit
2010 G-20 Seoul summit
The 2010 G20 Seoul Summit was the fifth meeting of the G-20 heads of government, to discuss the global financial system and the world economy, which took place in Seoul, South Korea on November 11–12, 2010...
.
Discussion over currency war and imbalances dominated the 2010 G-20 Seoul summit
2010 G-20 Seoul summit
The 2010 G20 Seoul Summit was the fifth meeting of the G-20 heads of government, to discuss the global financial system and the world economy, which took place in Seoul, South Korea on November 11–12, 2010...
, but little progress was made in resolving the issue.
In the first half of 2011 analysts and the financial press widely reported that the currency war had ended or at least entered a lull,
though speaking in July 2011 Guido Mantega told the Financial Times that the conflict was still ongoing.
As investor confidence in the global economic outlook fell in early August, Bloomberg suggested the currency war had entered a new phase. This followed renewed talk of a possible third round of quantitative easing by the US and interventions over the first three days of August by Switzerland and Japan to push down the value of their currencies.
In September, as part of her opening speech for the 66th United Nations Debate
General debate of the sixty-sixth session of the United Nations General Assembly
The general debate of the sixty-sixth session of the United Nations General Assembly speaking schedule in the General Assembly Chamber in September, 2011 were as follows:-Subjects:...
, and also in an article for the Financial Times , Brazilian president Dilma Rousseff
Dilma Rousseff
Dilma Vana Rousseff is the 36th and current President of Brazil. She is the first woman to hold the office. Prior to that, in 2005, she was also the first woman to become Chief of Staff of Brazil, appointed by then President Luiz Inácio Lula da Silva....
called for the currency war to be ended by increased use of floating currencies and greater cooperation and solidarity among major economies, with exchange rate policies set for the good of all rather than having individual nations striving to gain an advantage for themselves.
Comparison between 1930s and 2000s
Barry Eichengreen
Barry Eichengreen is an American economist who holds the title of George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, where he has taught since 1987...
and Goldman Sachs's Dominic Wilson have suggested the net effect will be similar to semi-co-ordinated monetary expansion which will help the global economy.
James Zhan of the United Nations Conference on Trade and Development
United Nations Conference on Trade and Development
The United Nations Conference on Trade and Development was established in 1964 as a permanent intergovernmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues....
(UNCTAD) however warned in October 2010 that the fluctuations in exchange rates were already causing corporations to scale back their international investments.
Comparing the situation in 2010 with the currency war of the 1930s, Ambrose Evans-Pritchard
Ambrose Evans-Pritchard
Ambrose Evans-Pritchard is the international business editor of the Daily Telegraph.A long-time opponent of the EU's constitution and monetary union, he was the Telegraph's Europe correspondent in Brussels from 1999 to 2004....
of the Daily Telegraph suggested a new currency war may be beneficial for countries suffering from trade deficits, noting that in the 1930s it was the big surplus countries that were severely impacted once competitive devaluation began. He also suggested that overly confrontational tactics may backfire on the US as they may damage the status of the dollar as a global reserve currency.
Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
, chairman of the US Federal Reserve, also drew a comparison with competitive devaluation in the inter-war period, referring to the sterilisation
Sterilization (economics)
Sterilization in macroeconomics refers to the actions taken by a country's central bank to counter the effects on the money supply caused by a balance of payments surplus or deficit....
of gold inflows by France and America which helped them sustain large trade surpluses, but which also caused deflationary pressure on their trading partners, contributing to the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. Bernanke has stated the example of the 1930s implies that the "pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account."
Other uses
The term "currency war" is sometimes used with meanings that are not related to competitive devaluation.In the 2007 book, Currency Wars
Currency Wars
Currency Wars by Song Hong bing, also known as The Currency War, is a bestselling book in China, reportedly selling over 200,000 copies and is reportedly being read by many senior level government and business leaders in China...
by Chinese economist Song Hongbing, the term is sometimes used in a somewhat contrary sense, to refer to an alleged practice where unscrupulous bankers lend to emerging market countries and then speculate against the emerging state's currency by trying to force it down in value against the wishes of that states' government.
In another book of the same name, John Cooley
John K. Cooley
John Kent Cooley was an American journalist and author who specialized in terrorism and the Middle East. Based in Athens, he worked as a radio and off-air television correspondent for ABC News and was a long-time contributing editor to the Christian Science Monitor.Cooley was one of only a handful...
uses the term to refer to the efforts of a state's monetary authorities to protect its currency from forgers, whether they are simple criminals or agents of foreign governments trying to devalue a currency and cause excess inflation against the home government's wishes.
Jim Rickards, in his 2011 book "Currency Wars: The Making of the Next Global Crisis," argues that the consequences of the Fed’s attempts to prop up economic growth could be devastating for American national security. In their review of the book, Publisher's Weekly said: "Rickards's first book is an outgrowth of his contributions and a later two-day war game simulation held at the Applied Physics Laboratory's Warfare Analysis Laboratory. He argues that a financial attack against the U.S. could destroy confidence in the dollar. In Rickards's view, the Fed's policy of quantitative easing by lessening confidence in the dollar, may lead to chaos in global financial markets." Kirkus Reviews
Kirkus Reviews
Kirkus Reviews is an American book review magazine founded in 1933 by Virginia Kirkus . Kirkus serves the book and literary trade sector, including libraries, publishers, literary and film agents, film and TV producers and booksellers. Kirkus Reviews is published on the first and 15th of each month...
said: "In Rickards’ view, the world is currently going through a third currency war (“CWIII”) based on competitive devaluations. CWII occurred in the 1960s and ’70s and culminated in Nixon's decision to take the dollar off the gold standard. CWI followed WWI and included the 1923 German hyperinflation and Roosevelt's devaluation of the dollar against gold in 1933. Rickards demonstrates that competitive devaluations are a race to the bottom, and thus instruments of a sort of warfare. CWIII, he writes, is characterized by the Federal Reserve's policy of quantitative easing, which he ascribes to what he calls “extensive theoretical work” on depreciation, negative interest rates and stimulation achieved at the expense of other countries. He offers a view of how the continued depreciation and devaluation of the dollar will ultimately lead to a collapse, which he asserts will come about through a widespread abandonment of a worthless inflated instrument. Rickards also provides possible scenarios for the future, including collaboration among a variety of currencies, emergence of a world central bank and a forceful U.S. return to a gold standard through an emergency powers–based legal regime. The author emphasizes that these questions are matters of policy and choice, which can be different."
Historically, the term has been used to refer to the competition between Japan and China for their currencies to be used as the preferred tender in parts of Asia in the years leading up to Second Sino-Japanese War
Second Sino-Japanese War
The Second Sino-Japanese War was a military conflict fought primarily between the Republic of China and the Empire of Japan. From 1937 to 1941, China fought Japan with some economic help from Germany , the Soviet Union and the United States...
.
External links
- Global economy: Going head to head article showing various international perspectives (Financial Times, Oct 2010)
- Data visualization from OECD, to see how imbalances have developed since 1990, select 'Current account imbalances' on the stories tab, then move the date slider. ( OECD 2010 )
- Why China's exchange rate is a red herring alternative view by the chairman of Intelligence Capital, Eswar Prasad, suggesting those advocating for China to appreciate are misguided (VoxEU, April 2010).
- Q. What is a 'currency war'? – view from a journalist in Korea, the hosts of the Nov 2010 G20 summit. (Korea Joongang, Oct 2010)
- Brazil's Currency wars – a 'real' problem – introductory article from a South American magazine (SoundsandColours.com, Oct 2010)
- What's the currency war about? introductory article from the BBCBBCThe British Broadcasting Corporation is a British public service broadcaster. Its headquarters is at Broadcasting House in the City of Westminster, London. It is the largest broadcaster in the world, with about 23,000 staff...
(Oct 2010)