By Anna Varfolomeeva
BEIJING— (October 15 –M4relay) – The world monetary earthquake with 23 currency interventions in a one week period has far reaching consequences. “It affected trade policy (America’s flirtation with protectionism), attitudes towards capital flows (new restrictions in Brazil, Thailand, and South Korea), and public support for economic globalization (rising anti-foreigner sentiment almost everywhere),” Simon Johnson wrote in his article Who caused the currency wars for Project Syndicate.
Argentina, Brazil, Russia, the U.S., South Korea, Egypt, Turkey and many more countries are planning to get into the race to cheapen their currencies by holding their exchange rates at an undervalued rate, thus boosting their exports and limiting imports. Consequently, with more and more countries getting into the monetary confrontation, the economic situation is getting out of control.
“The hypothesized currency war in which the Fed buys euros and the ECB buys dollars might not do any harm, but it probably wouldn’t help, either,” the famous economist Paul Krugman wrote in his opinion page for the New York Times. “In the 1930s, competitive devaluation mattered largely because a number of countries were still on the gold standard, and were keeping interest rates well above the zero lower bound in an attempt to preserve their gold reserves. Devaluation relaxed this constraint by making the gold worth more in domestic currency, and hence was expansionary. Today there’s nothing like that,” he wrote.
If there are no significant economic benefits from the above-mentioned actions, one may start asking why the race started at first place.
The International Monetary Fund’s Managing Director, Dominique Strauss Kahn, recently told the Financial Times that “clearly the idea is beginning to circulate that currencies can be used as a policy weapon…translated into action, such an idea would represent a very serious risk to the global recovery…. any such approach would have a negative and very damaging longer-run impact.”
“Don’t be fooled for a minute. The issue of Yuan devaluation is a political distraction from the real issue – a failure of US policy leadership,” Gordon T. Long, a former senior group executive with IBM & Motorola, wrote in his article Currency wars: Misguided US Economic Policy.
The field of economy once again was proven to be closely interconnected with the field of politics. They supplement each other and at the same time can be used as “war weapons.”
Keeping in mind the above data, it seems that deliberately nothing is done to solve the economic problems.
“Considered more broadly, the seriousness of today’s situation is primarily due to Europe’s refusal to reform global economic governance, compounded by years of political mismanagement and self-deception in the United States,” Jonson wrote for Project Syndicate.
Stephen King, the managing director of economics at HSBC wrote for the Independent: “the rich Western world has over-consumed in recent years. It has too many debts. But rather than dealing with those debts – living a life of austerity, accepting a period of relative stagnation – the West wants to shift the burden of adjustment on to its creditors, even when those creditors are relatively poor nations with low per capita incomes. And that rankles not just with the Chinese but also with many other countries in Asia and in other parts of the emerging world. During the Asian crisis in 1997-98, Western nations, under the auspices of the IMF, insisted that Asian nations, having borrowed too much, should now tighten their belts. But the US doesn’t seem to think it should abide by the same rules. Far better to use the exchange rate to pass the burden on to someone else than to swallow the bitter pill of austerity. No wonder the Chinese are not willing to play ball.”
As Gordon T. Long noted, an unusual Wall Street Op-ed piece appeared in October, written by Yiping Huang, a Professor of Economics – China Center for Economic Research at the Peking University. He called for common sense from Americans and the G20 regarding the potential for destructive currency wars: “The upcoming Group of 20 Summit in Seoul could become a battlefield of this new conflict. But it doesn’t have to be. Rather than focus on currency manipulation, all sides would be better served to zero in on structural reforms. The effects of that would be far more beneficial in the long run than unilateral U.S. currency action, and more sustainable… It would be much better for the G-20 to focus on a comprehensive package centered on structural reforms in all countries. Exchange rates should be an important part of that package. For instance, to reduce the U.S. current-account deficits, Americans have to save more. But simply devaluing the dollar would not be sufficient for that purpose. Likewise, China’s current-account surpluses were caused by a broad set of domestic economic distortions, from state-allocated credit to artificially low interest rates. Correcting China’s external imbalances requires eliminating all of these distortions.”