Understanding the
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Understanding the "Currency War" Talk


World growth remains relatively stagnant. Nearly all major economies are experiencing growth rates which are either below trend, low, or in outright contraction.  This is a world of inadequate demand, and a world where capturing as much global demand as possible (whether at home or abroad) is an inevitable, if undeclared goal of much policymaking.

For now, the trading systems for much of the world remain fairly open. Countries with a high level of domestic demand (especially the United States), are for the most part adhering to their WTO commitments and not limiting foreigners’ access to their markets with overt protectionist measures such as tariffs or quotas on imports.  Yet many policies can have a trade effect, and one key area where the WTO remains toothless is that of currency manipulation.  After the 1997 Asian Financial Crisis, many affected Asian countries actively built up foreign currency reserves to protect themselves against foreign debt crises. The side effect (or perhaps main goal) of course was to suppress their currencies’ values. In 1994, China devalued the RMB from 5.8yuan-1USD to 8.7. In order to maintain this peg, the People’s Bank of China had to build up huge reserves.

Recent events in Japan have renewed discussion of the prospect of a “currency war”. Such a war could be defined as a “beggar-thy-neighbor” tit-for-tat series of moves in which various countries try to devalue their currency in an attempt to increase the competiveness of their goods on foreign markets, whilst doing the opposite for foreign goods in home markets. 

Complicating the issue are the various ways in which currencies’ values can change.  A currency peg is the simplest form, whereby a country (normally via its central bank) intervenes in foreign exchange (forex) markets to maintain a set nominal value of its currency against another (usually in the modern era the U.S. dollar). 

More subtle would be the manipulation of one’s own fiat currency value through expansive monetary policies. Often wrongly described as “printing money,” a basic explanation would suggest that an increase in supply of a currency would lower its value, “debasing” the currency if not through simple supply and demand dynamics then through the effect of lowering domestic interest rates and thus encouraging capital to leave the country in search of higher returns abroad (lowering demand compared to other countries’ currencies.)

So, has Japan started a “currency war”? Or were its recent monetary moves entirely domestic in focus?

There have indeed been rumblings of “currency wars” from many countries in recent years. Particularly loud has been Brazil, which is seeing its manufacturing sector undercut primarily by Chinese imports (boosted by what has widely been perceived as an undervalued RMB).  Switzerland has openly intervened in its currency value, trying to limit the Swiss Franc’s appreciation as funds flowed into the country due to its “safe haven” status.  Japan has also moaned about this phenomenon, and even acted to limit the rise of the Yen.  The U.S. and UK’s quantitative easing programs have been accused of being at least partly currency focused. 

Meanwhile, suggestions that Spain, Greece or Italy might better boost competiveness by leaving the Euro and then devaluing (and defaulting) rather than undergoing years of painful austerity and unemployment (boosting competiveness through resulting wage drops) continue to worry Germany.  New Zealand Central Bank Governor Graeme Wheeler has also warned that his institution may intervene to halt rises in the New Zealand Dollar.

One main difficulty in defining a currency war is that it is natural for a currency to change in value as an economy grows (or contracts) or changes, productivity increases (or falls), trade and investment patterns shift or fund inflows from a persistent trade surplus cause domestic inflation (and thus real appreciation). 

Furthermore, Japan (in particular) and other countries do have natural checks on their ability to carry out “competitive devaluations.” For example, post-Fukushima Japan, with its anti-nuclear energy policy has to import more energy from abroad, and a weaker Yen increases the costs of such imports. Eventually, consumers will have to pay for these costs. 

So despite the recent G-20 meeting’s apparent success in averting a full blown currency war, we should remember that currency manipulation is only one tactic in a much larger strategic goal of capturing as wide a share of global demand as possible. The longer a return to healthy global growth takes, the more likely such trade frictions are to emerge.  It is almost natural for every country to try and shift as much of the cost of adjustment onto others, even if the end result of such self-interest is a net loss for everyone.

February 25, 2013 at 21:59

China avoided the GFC because her currency trade is only for goods and services…or….China avoided the slowdown in growth that the GFC would have brought her (due to relying excessively on foreign demand) by engineering a massive monetary expansion (China created nearly 50% of global GDP since 2008). Such a monetary expansion may kick the can, but it also makes the can much bigger. The crisis hasn't even hit China yet (other than knocking off a few %points of GDP growth.). The crisis will hit when as all this new debt (which fuelled the growth saving investment) becomes due and can't be paid without rollingover or heavy subsidies from other sectors – all of which will have their own adverse effects. China's debt to GDP ratio has skyrocketed, its Credit:GDP ratio has worsened (because of the overinvestments), and pumping money at it (through official banks, shadow banks, LGFPs, and now rolling over again) will create more and more distortions.  The seeds of each crisis are sown in the response to the last one…this will prove very true for China!

February 25, 2013 at 21:33

Your first sentence is true. The rest of your reasoning conflicts with the facts and economy theory. IF the trade surplus is the result of import restrictions on hi-tech goods, then why has the PBOC intervened so heavily in the forex market, and bought up nearly $3trillion USD of foreign assets? (the most of any country in history, and probably the largest as a % of GDP and even global GDP in history). Remember also that this intervention is by definition a loss making trade, so it is not a "normal" investment! Exporting that capital abroad necessarily (it's an equation) results in China having a current account surplus.  If running a deficit brings such advantages (rather than a surplus), why would China deliberately bestow these advantages on the United States by exporting capital and strengthening the dollar? A dreadful lack of logic on your part.  Why do Chinese government officials constantly worry about the effect of a rising RMB on Chinese jobs and stability?

In fact – a trade deficit = a large and growing employment impact.

                                 = or a large and growing debt build-up impact (which will eventually result in a crisis in most cases).

China has intervened in its forex market since 1994 BECAUSE it gives China a net boost to growth (even if delivering a worsening terms of trade and effectively subsidising exporters at the expense of everyone else in the country.) China decided that GDP growth was more important than wealth distribution and more important that long term financial and economic health (and more important than environmental protection and people's health).  Now it is waking up. Everyone would welcome China running trade deficits, everyone but China that is!



Tom F
February 25, 2013 at 10:59

Yes, you have put it quite eloquently, but I think the reason why it has been allowed to go on for so long, and the reason why we all ignore the persistent and significant market operations on currency carried out by China is because we all hope that China sees the light before it damages its own economy as well. 

The other issue that has not been discussed, and perhaps it might work in China's favour is the capital account, and it's difficult to have a proper dialogue about the capital account and trade accounto together if both America and China have issues about sovereign wealth funds. Don't forget that much of the reserves China holds is sovereign (unlike US, which is mostly private).

February 25, 2013 at 09:39

@Tom F

Please check the financial newspapers and decipher for your own benefit.  Of the forex traded in the market, how much of this is for goods and services?  How much of this is for pure currency speculation?  China managed to escape the full effects of GFC because her currency trade is only for goods and services.

February 25, 2013 at 09:30

Countries cannot run persistent surpluses unless other countries run persistent deficits.  That the USA can be a persistent trade deficit country is because other countries are willing to let it to be so.  A defict country enjoys a much higher standard of living than it otherwise could be.  Surplus countries would suffer inflation as there would be too much money (from exports) chasing fewer goods in their own countries (e.g. China).  The case of China-USA trade relationship is unusual in the sense that Chinese surpluses piled up consistently due to the fact that USA refuses, for so-called security reasons, to sell the goods that China wants to purchase from the USA.  There is politics involved in the USA-China trade imbalances.

February 24, 2013 at 21:32

I think that Mr Parker's point is that Japan is reacting to its current circumstances, themselves being partly created by currency policies in the rest of asia dating back to the 90s at least. China's devaluation of 1994 was not an issue then because China was relatively small, it became much more of an issue when China's economy was in the top 6 in the world. The amount of reserves it needed to maintain the peg were in and of themselves destabilizing when its economy was so big. The peg gave Chinese goods an additional competitiveness (which was probably unneccessary given the low labour costs in China AND the subsidised capital costs). No idea why the ROW allowed this to go on for so long. It wasn't good for any other manufacturing economy, it wasn't good for any other developing economy, and it wasn't good for China.

Dangerous Year End In Year Of Snake
February 24, 2013 at 16:50

US currency is up for the next 5-6 months while the other majors reduce in relation. Let's see whether there will be a sudden precipitous collapse of the US Dollar after that peak.  The US Treasury is accumulating devaluing foreign majors now.  trouble is, once everyone knows the game Caesar and Washington is playing,  the situation might turn topsy-turvy.  Already large trading nations like Germany, Russia and China are accumulating gold to protect their currencies from fluctuating too much in a Wall Street induced volatile environment.  Wait and see.

February 24, 2013 at 13:32

swap agreements are not an answer. the Imf should step up and attempt to actually prevent currency manipulating policies in major economies. it is in fact easy to know what a currency should be worth relative to others…let the markets decide, but place limits on the amount of currency reserves relative togdp that a country can aquire , and one side of this would be to do what keynes suggested; limit countries abilities to run persistent current account surpluses via multinational action or penalties.

Tom F
February 24, 2013 at 08:47


I completely disagree with your entire post, not that I think there's any pursuasive value to it, it just seems like off the top of your head emotional discharge. George Soros, I thought this has been settled, if you manipulate your currency, you will be caught out, particularly if you have run your foreign reserves down to such an extent that a sizeable hedge fund can have a go at it (market police in action).

Bretton Woods, what are you referring to? or is this just rampling? US dollar is on the market, Euro is on the market, BP is on the market, the only currency not fully transparent is the Yuan, so what's America got to do with it all? 

The fact is, and even CCP China admits to it in their response to accusation of currency manipulation, is that China has managed to achieve very good 'tems of trades', and with the foreign reserves they have, they can control/manipulate their currency without fear of hedge funds doing a number on them.

And your last point, countries already do swap (as you call it), it happens thousands of times a day on the Forex market, and it does so fully transpartent (except the Yuan). When China manipulate the Yuan, it is attacking the 'terms of trades' of all of its trading partners, and a currency war is really the only way to respond for China's trading partners, and guess what, it going to appear like China is being ganged upon, just look at what is happening with the Euro, USD, JPY etc.

Tom F
February 23, 2013 at 12:17

I thought the first shot has already been fired. All things being equal, it's quite plausible that the GFC has actually put the US on quite a solid footing for what is a global domino effect starting with europe, and now looking like Asia as well. Japan has said it did not pull the trigger, but then who's going to admit they've pulled the trigger, and if anyone is going to own up, then surely it'd have to be the party in need of offloading vast amount of PV panels onto the world market.

I'm just glad we're having a currency war rather than a military war.

February 23, 2013 at 10:40

Speaking of Currencies/Wars

Why is it that no one is mentioning that the EURO EYPO

is bonafide?  In all of this discussion regarding my EURO EYPO

I continue to wonder whether any of the commenters have understood the first and most basic

principle regarding the Monetary Currency EURO and that is that it is BONAFIDE, and wonder

increasingly whether anyone has even bothered to read the Treaty.  I continue to wonder, after

scanning this article,,, and by the way, who is James Parker and what the hell are you braittling about?

From The Private Office of Angela T. Marson

International Relations Specialist

February 23, 2013 at 09:20

Self-interest is the survival instinct.  Yes, Bretton Woods agreement was a good one, except the Americans did not keep their end of the bargain.  Using one strong currency, which was pegged to a gold standard, to be pegged by other countries was orderly.  Now that we know that even the strongest and richest country then could not be trusted, what do we do next?  Competitive pricing of goods or even currency is natural in a "free" market.  Now that even the so-called "capitalist" countries have woken up to the fact that "free" markets are not perfect (in the words of George Soros), should we all sit down and do a deal on currency prices?  Of course using the phrase "currency manipulation" will not help as there is no single way of saying how much one's currency is worth in the open market.  Looks like countries will have to come to "swap agreements" with each other, and discussed bilaterally instead of multilaterally.

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