It has been no secret that in recent times the world economy has been embroiled in a bit of a battle of attrition unlike any other. It really has been a case of “us against the world”, as some romantically like to label it. Every nation has tried to look out for its own interests and this is best seen in Brazil’s finance minister, Guido Mantega, declaring not even a month ago that “an international currency war” is now upon us like none before it and he international press has been quick to lap it up. No more is any nation talking sweet talk about holding hands and co-operating in order to jump-start a near comatose global economy. Things have suddenly become a whole lot more confrontational and every nation is blaming the other for skewing global demand and not doing their all as a social responsible citizen.
The choice weapons of this war are such instruments as quantitative easing (the act of printing money in order to purchase bonds), currency intervention and capital controls. There is a lot of bluster and fury surrounding it all, but in the midst of it all, there are three very clear pitched battles being waged. One of the most clear ones involves China and its unwillingness to allow the Yuan to rise more quickly than it has, leading to the Chinese being dubbed everything officially short of being called a currency manipulator. Many have about the damage this does to global dynamics and it was no surprise to see the House of Representatives seek to allow firms the possibility of tariff protection against currencies such as the Yuan that dramatically undervalues itself. China, and it’s great wall of protection as you can imagine, is a raging topic for American and European leaders.
The second hot topic is the monetary policy being followed by the more prosperous nations of the world. Primary is the concern that several central banks the world over might start to print money in an effort to buy bonds and aid their nation. The dollar has dropped rapidly on this assumption as the markets have anticipated the Federal Reserve indulging in another round of quantitative easing in an effort to ease America’s economic woes. The Euro, in contrast, has done the opposite and risen since there is no interest from the European Central Bank to make such a move. The emerging markets feels that this act creates a distortion field of its own as quantitative easing drives investors into their arms expecting a higher yield.
A third bone of contention is the manner in which developing economies have responded to capital flows. These economies haven’t let their currency rates soar and many governments have stepped in to purchase foreign currency or changed the tax code as it pertains to foreign capital inflows. Brazil and Thailand are a prime example of this but as yet we are not in the trenches. These skirmishes represent little by way of a full blown currency war and things are a lot worse on the face of it than they actually are. There is no real risk of trade retaliation and capital-inflow controls are as they should be while currency intervention is not as widespread as people say it is. This is a war to be avoided, not waged, and it seems as if we are not yet in the trenches.