Economics and Finance
CURRENCY WARS IN 2010

Background of the Story

Perhaps the onset of currency war started when the US government decided to print more money to stimulate its economy – a situation more often referred as seigniorage. Seigniorage is the term used to refer to the situation where a particular government makes profit through the increase of money supply in an economy. In the currency war context today, it happens when the government prints more money in order to buy its own debt as well as to pay itself interest on the debt (Guppy, 2010).  The US is doing these because the Federal Reserve believes that they can print money to get out of their problem. The currency war is becoming worsened when the Federal Reserve started the second round of quantitative easing. This has trigger fears of dollar devaluation and indirectly causing the flood of hot money into various emerging countries (Dervis, 2010).

There are several causes of the currency war. Firstly, the prevailing exchange rate system is lopsided, whereby China has essentially pegged its currency to the dollar while most other currencies of other countries fluctuate more or less freely in the global market. The act of printing money by US government is indirectly causing devaluation of the USD around the world. However, as the China RMB is pegged to USD, the China RMB is becoming relatively cheap if compared to other currencies. This give China RMB competitive advantage, as when the RMB is cheaper relative to other currencies, the export industry of the nation is being stimulate and growth rapidly. However, the currency of the other nation is determined by market forces, and many of the other exporting countries such as Japan, Germany, Brazil, Malaysia, Thailand and etc. are being hurt. As the currency of these countries become relatively more expensive, the export industries from these countries are being hurt significantly. Thus, these countries responded by competitively depreciating their respective currencies, to keep the export industries vibrant and the economy in the nation to keep growing. As a result, the world is entering a currency war – whereby the US focus on quantitative easing (by printing money electronically in an aggressive manner), causing China to respond by not letting its currency to appreciate.

The situation is becoming more serious when the US is planning to continuously printing money as long as the US economy is not coming out from the threats of deflation. This causes the flood of hit money to the other countries, particularly the emerging countries in Asia. The flooding of capital to these emerging countries causes the economy and financial system in these countries to become unstable. Specifically, the assets bubble is forming in these countries and possibly worst still, causing the currencies of these countries to appreciate – significantly hurting their exports. When continuously devaluating their currency may not be a viable option, these countries will engage in capital control. Capital control is often negative against the flow of trade and investment around the globe. If capital control is implemented, the globalization process is hurt, and worst, as the economic activities due to international trade is being hindered and impaired, the global economy growth rate may slow down, potentially goes into a worldwide recession if currency war or trade war proliferated for an extended time.

 

Currency War as Reported by other News Outlet

The illustration, description and perceptions of various media on the subject of currency war differ. Many of the perceptions and interpretation by the mass media from different countries are indeed twisted and incomplete. In fact, it is not hard to observe that the picture of currency war as portrayed by the different mass media in different part of the world serve self-interest. Most of the time, the interpretation of the currency war related issues are one-sided and misleading.  Many of the mass media reported that currency war is created by China, and the Chinese must be reprimanded and taught a lesson. The many politicians have such a view as well, as they are blaming China for manipulating the currency and creating various economic issues in US. However, the mass media in China largely reported that the currency war is created by US. It is widely asserted that US government wrong judgment as well as the failure of Federal Reserve is the main culprit causing the slow economic growth and threats of deflation in US. It is argued that constant money printing in US is casing the previous financial crisis in 2008. Not only that, it is the greedy and irresponsible investment bankers in US that is creating various moral hazard that force the US government to take up toxic assets from various big banks. Not only that, the politicians in China repeatedly commented that the devaluation of China RMB will not solve the issues in US, but indeed may cause economic instability and recession in China. Apparently, the mass media have their way of blaming the problems away to the other parties. Nonetheless, there are also many publishers or mass media that take a more objective and fair interpretation on the event. With critical thinking and sharp observation, these scholar and economists successfully pointed out the real issues haunting the economy growth as well as creating currency war recently. Many insightful ideas are provided to solve the currency war issue and many strategies are also provided to correct the various trade imbalances throughout the world.

 

The Importance of Studying the Subject in Details

A good understanding on the cause and effects of the currency war is highly important. Firstly, the public must have the true knowledge on how the phenomenon of currency war is formed, and the real culprit behind the event. Secondly, the public must understand that finger pointing will not solve the issues, but instead, everybody is responsible to play their own part, to understand they have a role to play in the currency crisis the world is facing. Thirdly, with proper understanding, the public will not easily be misleaded or cheated by those politicians with little knowledge on economic but are skillful in public speaking or manipulation of public opinion. It is too important for the mass public to understand what is going on so that the crises can be solved in an effective manner.

The currency war is indeed a highly dangerous and harmful crisis to the globalization process if it is left unsolved. There are many ways the currency war can threatens the stability and prosperity of the globalization process if it is left unsolved. For example, as the US government is aggressively devaluating its currency, hurting the exports of the other nations around the world, the rest of the countries may react by devaluating their respective currencies as well. This may cause each and every country to concentrate only in its self-interest during the slow economy recovery; which will eventually causing trade protectionism that cause hurt the globalization process (Rigillo, 2010). The currency war may in turn worsen to become a trade war, and the global trading process will be hindered, prevented and impaired. For example, in November 2010, the Brazilian President Luiz Inacio Lula da Silva commented that he will take whatever necessary measures to not allow the country’s currency to appreciate and to fight for Brazil’s interests in face of currency war. This is similar for Japan as well. Recently, Japanese government started to intervene the country’s exchange rate to keep the currency undervalued so the export industries in the country are not being hurt. Apparently, if this situation is unsolved, the world is at the brink of a currency war, that is likely to lead to a trade war and protectionism that can cause the entire world to enter into a recessionary era.

 

Secondary Research on the Subject

An in-depth research on the subject on currency is urgently required, although that is not an easy task. The research on the subject is performed in this writing by understanding the various issues related to the currency war from multiple perspectives, and to eliminate emotional and blames from certain parties with self-interests. Only by understanding, studying and researching the various issues related to currency war, one can elicit the true and objective picture on the subject. Without proper investigation on the subject, the public will be easily mis-leaded by various misconceptions articulated by the mass media. With such philosophy in mind, several critical lessons related to currency wars are discovered. All these points are presented in the following paragraphs.

The argument that China has no role to play in the currency war because it is financial mismanagement by US government that is the main culprit leading to the currency war is incorrect.  According to George Soros, as reported by Financial Times, the global currency crisis must be fixed by China, although US government is largely to be blamed for the crisis. The reason is simple, since the financial crisis, China has been in the driver’s seat. However, it is argued that China has not been serving the global interests well. It is argued that China is manipulating the currency by pegging the RMB to USD. By having slow appreciation of the RMB, China is taking advantage with cheaper exports from countries such as Korea, Japan and countries in the Southeast Asia. This cause the other countries to start intervene their own currency to preserve the export industry of respective countries.

The claim that the Chinese government is the sole culprit for the currency war is also not true. In fact, the wrongful decision making by Federal Reserve in US is the main contributor to the currency war. For example, the printing of money is in fact an indirect manipulation of the US exchange rate, as it is highlighted by Germany in the G-20 meeting. As a result, the constant money printing by US government will hurt the exports of the other nations. The other nations are then forced to engage in competitive devaluations of their respective currencies.

One of the serious misconceptions is that the currency appreciation of RMB is detrimental to the health of China’s economy. The currency war arises because US demanded the China RMB to appreciate significantly. China authority responded that the appreciation in RMB will cause the economy to become unstable or fall back into recession. However, this is not the case. George Soros argued that in the long term, only those exporters from China may suffer as they are overextended as well as the currency surplus that the Chinese government is accumulating will diminish. On the other hand, the majority of the public in China may benefit greatly, as the appreciation of RMB enable them to buy quality products, services and technologies from the other countries at a much cheaper rate. This means the standard of living in China will increase greatly. Thus, it is safe to expect that a modest appreciation of RMB at a rate of 10% per annum is healthy and reasonable.

It is a fatal assumption that the US government can print money to get out from the serious financial crises in the country. In the past, the US government has been practicing monetary expansion policies, i.e., printing money to get the nation out of recessions. However, there are many reasons that this may not work this time. Firstly, the financial crises in the 2008 is simply too huge. Secondly, the sustained structural debasement in fact does not provide a structural solution to the problem of the US economy (Guppy, 2010). To stimulate the US economy, the large population has to change their mindset – to work harder, save more and the corporation has to innovate to enhance the export volume of the nation. Thirdly, it is also reasonable to believe that continuously pump money into the economy may not stimulate consumption and spending. However, it is most likely that the easy money will be used to acquire other companies by larger corporations. When that happens, the US economy will never growth as the Federal Reserve expects. Apart from that, the cause of the slow growth and high prospect of deflation in US is due to a very weak demand in the country, but not due to the lack of liquidity in the economy. To correct the issues, it is better to enhance consumer spending and to create more jobs in the country.

 

Conclusion

What is often and massively reported in the mass media is not necessary true, and many times, it is outright misleading and incorrect. That is similar to the case where politicians may promote an idea for their self-interests. The case of currency war that is hotly debated is such a case. In the issue, simplistic assumptions, arguments and storytelling should be avoided as all these methods may deliver incorrect knowledge to the public. Instead, a rigorously debate on solid economic principles and knowledge should be used as the framework to approach such an issue. The issue of currency war is selected to demonstrate the idea that the picture portrayed by mass media can be highly misleading because currency war can be a highly risky and damaging social and economic issues to the world it is left unsolved. Overall, all parties, mainly US and China has their respective role to play to solve the issue. The Chinese should slowly let the RMB to appreciate in the marketplace, while the US is urgently requiring structural changes in the economic system. To print more money may not solve the problem and in fact, is hurting many of the other countries. A better way is for the US citizens as well as the politicians to face the fact and work hard, being frugal, becoming entrepreneurial and innovative to solve the issues, rather than choosing quick fixes such as printing money to inflate the economy out of recession.

References

APEC Finance Ministers Vow to Prevent Currency War. 2010. Jiji Press English News Service November 6, pg 2.

Authers, J.  2010. Everyone will lose in a global currency war : The Long View. Financial Times, October 9.

Beattie, A., Brown, K.,  Cookson, R., and Johnston, T. 2010. Fears of currency war rise. Financial Times, October 13.

Brazil’s Foreign Minister Weighs in on Currency War. 2010. Finance Wire October 14, 2.

Cermak, C.  2010. FEATURE: Fears of currency war grow as East-West divide deepens. McClatchy – Tribune Business News October 7.

Crook, C.  2010. Time to get tough with China. Financial Times, October 11.

Currency war may have a silver lining. 2010. Financial Times, October 15, pg 19.

Currency war risk threatens investment recovery: UN. 2010. The Financial Express, October 15, 32.

Currency war. 2010. Financial Post, October 27, pg 6.

Dervis, K.  2010. Keep the faith: the G20 can stop the war. Financial Times, November 9, pg 10.

EDITORIAL: No winners in currency wars. 2010. McClatchy – Tribune Business News October 19, pg 21.

EDITORIAL: World braces for next big battle in the currency war. 2010. McClatchy – Tribune Business News October 28, pg 32.

Guppy, D.  2010. OPINION: Indications of a currency war under way? McClatchy – Tribune Business News November 8, pg 12.

Larrain, F.  2010. Both China and US at fault in currency war. Financial Times, October 18, pg 56.

QE ‘triggering currency wars’. 2010. Investment Adviser, October 18, pg 18.

Rigillo, N.  2010. PREVIEW: G20 summit seeks an end to global currency war. McClatchy – Tribune Business News November 8, pg 13.

ROUNDUP: G20 seeks to prevent currency war, agrees IMF reform. 2010. McClatchy – Tribune Business News October 23, pg 10.

Schafer, D.  2010. Germans exporters wary over currency wars. FT.com, October 20, pg 15.

Smith, H.. 2010. Currency war ‘threatens’ global recovery. Investment Week, October 11, 1,3.

Subramanian, A.  2010. America cannot win the currency wars alone. Financial Times, October 21, pg 11.

The U.S. Will Lose a Currency War; The Group of 20 should focus less on exchange rates and more on structural reform. 2010. Wall Street Journal (Online), October 13.

Wolf, M.  2010. How to fight the currency wars with a stubborn China. Financial Times, October 6.

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