Who’s winning the currency wars?

October 11, 2010

Those who are worried about currency wars are too late — the wars are already here. China and the United States are both winning the race to cheapen their currencies for now. But if the rhetoric keeps heating up, everyone will be a loser.

American and Chinese officials traded blows over the weekend, setting the stage for a tense G20 summit next month. The head of China’s central bank rejected the idea of a big revaluation for the yuan, advocating a slow-acting “herbal medicine” instead. Treasury Secretary Tim Geithner took a swipe at countries with “significantly undervalued” currencies, of which China is an obvious example.

The United States claims to be a loser in the currency wars. But in reality it is winning. The dollar has fallen sharply against most of its trading partners’ currencies. On a trade-weighted basis, the dollar is the lowest it has been all year, according to the Federal Reserve major currencies index. The likelihood of an imminent bout of money-printing can keep that trend going for a long time.

China, meanwhile, claims not to be a winner. But that is disingenuous too. While the yuan just hit its highest level versus the dollar since officially abandoning its dollar peg in 2005, it has fallen heavily against most other currencies. The euro, the currency of China’s biggest trading partner, has strengthened 14 percent against the yuan. The Japanese yen is not far behind. Various emerging markets, such as Brazil, have also seen their currencies soar.

The gap between winners and losers is widening. With rates as low as can be in the West, money has poured into assets in the East and South. Many Asian stock markets are at multi-year highs — benchmark indices in Indonesia and the Philippines hit records last week. Emerging market bonds too are rallying, as investors scramble for yields. That adds further upward pressure to currencies already out of relative whack with their trading peers.

There is no easy answer. But that, unfortunately, is a fact of life when the world has been living in such an unbalanced way for years. A rate hike in the United States might squash economic growth and leave the world facing another dip. A rapid China revaluation could price the country’s exporters out of the market and lead to widespread unemployment.

A gradual but sustained revaluation of the yuan versus the dollar — combined with a halt to the dollar’s own depreciation — is the least bad way forward. But getting such a deal, as positions become increasingly entrenched, will be tricky. And if both sides refuse to do anything, a currency war could mutate into a trade war — a genuine lose-lose scenario.

Comments

I am a bit lost what the US is trying to achieve over the past 60 years.
An appreciating currency draws investment dollars, creates infrastructure, R&D, and manufacturing and jobs. While a decreasing currency pushes the investment dollar to leave, for better returns.
The US has always pushed to devalue its currency since 1950′s while Europe does the opposite. Europe always wanted a strong currency, and strong MARK and now more so, a strong EURO.
The inflow of investment dollars creates a strong economy, but one has to be careful not to overheat the economy thus the gradual inflows is required.

I remember the proud dollar stood 1:4, today it stands 4:1 The depreciation has been 100 fold.
Europe in general is doing fine, the people live better than people in the USA. (In general) They travel more, and 30 days a year to see the world and can afford it, like US citizens did in 1950′s. Anyone could travel anywhere, the dollar was Almighty.

So here we go again de-valuating the dollar more by printing “QE” instead of allowing it to grow by market forces and production of goods.

Don’t people realize every time the dollar drops your standard of living also drops. Soon you’ll have a basket of worthless paper or the dollar bill will have a few extra Zeros on it. Why do we concentrate on driving down the dollar and wishing a few other countries do the same, instead relying on creating a business friendly atmosphere. The small Mon&Pop hiring 5 to 25 employees will also disappear within the next 5 to 10 years due to over regulation. There is only so much time per day to be productive.

Posted by DDavid | Report as abusive
 

Governing wisdom does not have a heart or a mind for new circumstances, and so the assumption that protectionism is BAD might just be a case of pure foolishness.

A protected economy that promotes innovation, true and genuine market economics where every individual is treated as a free thinker, might just be what the USA needs. What is wrong with self-sufficiency? What is wtrong with moral integrity? Circumstances are indeed calling for ecomomists to upgrade themselves with some phylosophy. The West is a place that has its roots in Greek idealism and it will not follow the path of the East without developping fantastic hatred aimed at this purely vicious pragmatism.

Posted by Neander | Report as abusive
 

There is no quick fix to this problem. Transfer of technical knowledge has accelerated the relocation of industrial manufacturing. China has low cost labor, the latest state of the art manufacturing machinery, the technical knowledge we provided and oodles of our money. The west has helped China build their industrial juggernaut and major multi-national companies around the world now rely on Chinese manufactured products & components to make a profit and pay dividends. Just because they are now the lowest cost bulk manufacturer of almost everything, we can’t say “Oops we need a do-over. Giving you all that technology was a bad idea”. There is no way to turn the clock back. Greed and a lust for low priced goods created this problem. The Yuan will slowly rise in value as the standard of living improves outside of the main cities in China. They will continue to expand with or without the approval of other counties. China will sell more and more of their manufactured products to developing countries to reduce its reliance on sales to USA and Europe. The west have dug themselves into a huge “debt hole” that will result in a lower standard of living in general and high unemployment. We need to accept the reality of the situation. The USA is printing money in an attempt to patch over the problem. That is also currency manipulation. Too late to single out China as a threat to world stability. A trade war and tariffs will make the situation worse. What if, as retaliation, China decides to more aggressively reduce its purchase of USA Government securities. By choking off imports from China that scenario will be self-fulfilling. And that will result in even higher unemployment.

Posted by QuePasa | Report as abusive
 

I have been working in the computer industry for 25 years… we thought them how to do it (cheap) and now they own it.. same for any other business… and I still see the same mistake is repeated again and again. With the excuse of cheap labor we still keep training them to new and innovative technologies, slowly, or I would say: “rapidly”, loosing our edge. Quality of life will go down in the US while all emerging market will benefit. Do we have room at least to regain a fiscal advantage and support business… hmmmm … nope.. so, we will not have any skilled immigrants either… quite bleak scenario.

Posted by robb1 | Report as abusive
 

For Neander

“What is wrong with moral integrity?”
Ask the government and Wall Street? You will have a field day.

For QuePasa

You have my vote if you run for President of U.S.A.
The Administration has no time to deal with all that you pointed out. They are just there trying to win the next election.

Posted by doctorjay317 | Report as abusive
 

Why are we even doing business with China, when they’re a communist country? Isn’t that why I can’t have Cuban cigars???

Our standard of living has continually been deliberately declining. When will my fellow Americans get their heads out of their backsides and wake the hell up?? The Federal Government doesn’t work FOR the citizens of this country…it works for a select few business owners and of course corporations who outsource cheap labor.

And if you REALLY want to end the debasement of our money…END THE FED. This unelected, private banking cartel is a criminal organization that has been stealing from you since 1913.

Posted by antonius2618 | Report as abusive
 

This is law of nature “what goes up must come down”.

Posted by Bally | Report as abusive
 

Cheap currency has its consequences. It reduces the standard of living. Now Americans have to pay more for the same goods including gas.

Posted by bkhjon | Report as abusive
 

These are the final days of faith-based paper currency. As Voltaire put it, the value of paper currency tends to fall to the value of paper, which is zero. You can find $100 trillion Zimbabwe notes on ebay for next to nothing. Other forms of paper currency will become curiosities in a few years.

Posted by terrymac | Report as abusive
 

At the end of the day,every one is a loser. The midterm election and political competitions have pushed the urgently needed efforts to improve the economy off the table while the economy sly backward draging employment along its slipery path. It appears that everyone is too busy holding the blame China banner that no-one is putting thewir mind to work on fixing the mess. Defending a handfull of trade groups in return for continued political supports will ultimately prove to be foolishly costly to the multitudes and make no contribution to the groups meant to saved(these trade group’s inability or unwillingness to adapt to the change economic environment-let them go down and start putting resources on sustainable industries).

Posted by Haung | Report as abusive
 

The US is relying too much on monetary policy and not enough on fiscal policy to solve our problems. This is bad for us and the world.

The US is the world reserve currency. There is something called the Triffin paradox. In the fifties, Dr. Triffin pointed out in the fifties that U.S. was at a perpetual competitive disadvantage because of its role as the world’s reserve currency. The US was printing dollars to support world growth but trying to keep the dollar pegged at $35 to an ounce of gold. Everyone knew this way unsustainable. When Nixon took us off the gold standard in the early 70s, the dollar remained the reserve currency. Friedman thought we wouldn’t be able to run up massive debt -what David Stockman called the $8 trillion mistake–Friedman was wrong. The US became the consumer of last resort for the world.

The system has been broken for years -US has lost entire industrial sectors because its impossible to compete against economies that have massive price controls on all their exports, in the form of discounted currencies. However, this was offset by the ever expanding extension of credit to Americans.

We reached the top of the credit cycle in 2008. Now Bernanke is trying to maintain price stability, due to the extraordinary amount of debt in the US.

Monetary policy however is starting a new credit cycle overseas as banks lend and speculate in foreign markets. That’s the rooot cause of the currency devaluations -too many dollars being sold to buy their currencies.

The rest of the world needs to pressure the US to use fiscal policy to create jobs and accept that the US has to have some kind of trade restraint system to offset, the negatives of being the reserve currency. If we don’t do this, we are going to have volatility and social problems which will escalate into world war as food, water and energy shortages take hold. We also need to globally, from the ground up focus on sustainability.

Posted by Barts | Report as abusive
 

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