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    0 Replies Latest reply on Apr 25, 2011 1:19 AM by Carlo

    Fighting the Currency War

    Carlo Wayfarer

      The  urge for superiority is human nature, and the most obvious proof of  this is global domination through war. Weapons of war such as jet  fighters, bombers, tanks, warships, and missiles are effectively used to  annihilate enemy forces to gain—and prove—one nation’s supremacy.


      However,  much of the world abhors such acts of violence and devastation. Thus,  today, the new battlefield is in the financial sector. The 21st century  will be fought by currency, and the embers are starting to glow. Who  will win? Will it be the Dollar, Yuan, Euro, or some other currency? The  world’s major currencies are fighting an invisible war, a war that  involves politics, businesses, central banks, and governments worldwide.  Unlike the Cold War where nuclear weapons were the armaments that make  the world tremble, today, money is the ultimate weapon of mass  destruction in this masqueraded battlefield. It is currency that  enforces the demands with the governments around the world, their  leverage to position themselves to power, consolidate, and expand. The  currency war was theorized and explained in detail by Daniel D. Eckhert  in his military-styled book “War of the World Currencies—How to Fight  Euro, Gold, and Yuan, the Legacy of the Dollar.”


      Over  the past decades, the players of this battle have been informally  divided into “deficit” and “surplus” countries. Deficit countries such  as the UK and the US borrow money from other countries so they can  import more than they can export. Surplus countries such as Japan,  China, and other Asian countries lend money to other countries to help  finance their exports. The Euro has been exporting as much as it is  importing, roughly staying in the balance, although there are also big  imbalances in its member countries: Germany has a huge surplus, while  Spain and Greece are running deficits, threatening national bankruptcy.


      During  the 2007-to-present financial crisis and global recession, imports by  the deficit nations and exports from surplus countries momentarily  collapsed. When the economy recovered, latest trade data has shown that  after the recovery, the imbalances have started to show themselves.


      This  phenomenon has generated volatile tensions waiting to explode. The US  and UK says it wants to export more products to help recover its  economy. China and Japan is withholding that opportunity, not wanting to  lose their competitive advantage. Thus, the fastest way to gain a  competitive advantage is by introducing a weaker currency. With the  global recovery still so weak, a large number of exporters in countries  around the world are suffering from the effects of their currencies that  are increasingly become stronger against the dollar.


      Unfastening the Linchpin


      Most  currencies fell against the US Dollar during the recent financial  crisis. Thus, investors, believing that the dollar was safe haven,  bought quantities of the currency. But now, since most currencies are  steadily rising against the US Dollar again as worldwide economy is  recovering, US interest rates are going near zero, and the country is  mired in a weak recover, making the dollar less attractive.


      China,  meanwhile, has pegged the Yuan to the dollar in 2007 and is stuck with  the peg during the crisis. In order to keep its currency weak against  the dollar, the People’s Bank of China bought trillions of the latter  currency. Naturally, the US was not happy about it and has spread word  that the move was to help keep Chinese exports artificially cheap.  Critics complained that even if China is performing well in economical  terms, the country possesses a huge trade surplus while other countries  in the world, especially the US, remains relatively economically weak.


      Last  June 2010, China cut some slack off the peg a bit after months of  pressuring by the US. However, the US government says the peg level is  inadequate. In response, the Chinese said that unlike other exporting  nations, they did not let the Yuan depreciate against the dollar during  the financial crisis.


      However,  the Chinese believe that if they increase the value of their currency  too quickly, the change will rapidly bankrupt many of its export  companies and destabilize their economy.


      The  US sees China as an anchor—if it can persuade Beijing to strengthen its  currency, other smaller exporter nations may follow and strengthen  their own currencies.


      The Rising Yen

      Decades  ago, the Japanese yen was weak thanks to the country’s zero interest  rates. It was a cheap currency for speculators to comfortably borrow in  and sell. Today, however, the currencies of UK, US, and the European  Union have near-zero interest too, which unsurprisingly is taking away  the Yen’s competitive advantage. Since the 2008 crisis, the Yen has been  rising steadily, hurting Japanese exporters and pushing the nation back  towards recession.


      The  Japanese intervened to weaken their currency September last year. The  move caused aggravation after China suggested that they might start  buying Yen instead of dollars. Also, the weakening was short-lived, and  the Yen is again strengthening against the dollar.


      Alternatives to the War


      The war of these major currencies leaves a big question—what can the US and UK do to lessen their deficits?


      One  option is implementing strict credit guidelines. The effect of the  financial crisis left consumers and companies reducing their borrowing.  If government of any of the deficit countries does the same, the deficit  may go down. However, if the noose is too tight, extreme austerity may  cause a recession, especially if the surplus keeps on lending.


      Another  option may be looser money. However, with the interest rates at or  near-zero, central banks are forced to quantitative easing, which is  printing money and injecting it to the economy to buy up debts or  intervening directly in currency markets.


      US  Congress is hoping of another radical option that Washington might  consider—imposing trade sanctions against China. However, just like in  any war, the aftermath can be devastating. Experts fear that imposing a  trade sanction raises the specter of protectionism—protectionism started  by the US that led to a collapse of trade that resulted to the Great  Depression of the 30s.


      Let’s see what will happen this time – what do you think?