War by other means
So it’s war. Although this outcome is hardly surprising, the fact that it is now ‘official’ marks a significant and highly negative development in its own right.
The war I’m talking about is about currencies and, by extension, economies. So it’s ‘only’ about jobs, profits and money. No-one is getting killed – but if the spiral into trade wars plays out, this will inflict on vast numbers of people around the world loss, poverty, disease and even death. Eventually, countries will go to war for economic reasons. That’s the way it has always been and there is no reason to believe this time will be different.
This month and this past week have seen critical developments in the currency wars. The key development of this week came from Brazil and that of the month came from Japan. The Japanese intervention in the currency markets on September 15, aggressively selling yen and buying dollars to reverse the yen’s rapid rise, was a milestone event in many ways. It was the largest-ever single-day intervention by Japan and it marked the resumption by Japan of a policy of intervention aimed at alleviating the massive damage inflicted on the Japanese export sector by the soaring yen.
Although the Japanese move was driven by domestic economic considerations, and its timing was a direct result of domestic political considerations, its main significance is regional and global. The Japanese reversion to a policy of open and large-scale intervention comes against background of growing tension between the US and China over currency policy and trade imbalances. By the time this article appears, the House of Representatives should have passed a bill aimed at pressuring China to push up the value of its yuan more rapidly; the Senate will probably follow suit and the legislation will land on Obama’s desk for signing. But Obama and his Treasury Secretary, Tim Geithner, have adopted unprecedentedly harsh rhetoric toward China in recent weeks – so the chances of a presidential veto on a popular measure just before the mid-term elections are low.
Not surprisingly, and perhaps legitimately, the American complaints do not impress the Chinese. After all, the Federal Reserve is pressing ahead with policies to prevent deflation (and spur inflation) – the inevitable side-effect of which is to weaken the US dollar. The Bank of England is intent on doing much the same and the Japanese have now jumped into the currency-weakening game with both feet.
China, along with South Korea, Taiwan and other Asian nations, have been systematically distorting their currency markets for years. Their currencies are generally linked, in one way or another, to the US dollar and thereby benefit from its weakness. This has given them a big advantage over other developing economies whose currencies are not so linked. The largest and most prominent of these is Brazil, whose real has appreciated in value by some 35% since early 2009.
The Brazilians have not taken this lying down. As long ago as last October, they introduced a measure of taxation on capital inflows into their country, although this is a major transgression of the principle of free capital flows – one of the pillars of neo-liberal economics. This week, Brazilian Finance Minister Guido Mantega said publicly what everyone knows but no-one would admit to openly: “We are experiencing a currency war”. The plain-speaking Senor Mantega has also said that “we are not going to lose this game” and “we’re already buying a bigger volume of currency — we’ll keep buying. We’ll buy any excess dollars in the market.” Of course it’s not Brazil’s fault, but everyone else’s: “Devaluing currencies artificially is a global strategy.”
Indeed, everyone is doing it – our own Stanley Fischer has been doing it since March 2008 and is still at it, for much the same reasons as the Brazilians and the Chinese, but fortunately we’re too small to get much attention. Nevertheless, everyone knows what Mantega knows – that artificial currency devaluations can only work if you do it and others don’t. If everyone does it, all currencies lose value in terms of real assets — hence the ongoing rise in precious metals – but no-one gets any lasting benefit.
That’s why the move to the next stage, of restrictions on capital flows, is almost inevitable. There will be increasing recourse to tariffs and other impediments to trade, and the whole cursed spiral to disaster that played out in the 1930s will repeat itself.
Of course this should not happen, and it need not – but the only way to prevent it is by co-operation and policy co-ordination between the main economic powers. That is precisely what is lacking in the global economy today and, despite the soothing statements that will emerge from the upcoming IMF annual meeting and the G-20 summit, no-one expects it to be achieved.
As noted here umpteen times, the fundamental problem facing the world today is excess supply and deficient demand. Not only are the various countries not doing what is needed at the global level to rectify the imbalances and thereby bring supply and demand into balance, they are actually continuing with, or intensifying, the same policies that created the problems in the first place.