It’s time to call an end to the “currency war.”
In 2010, Brazilian Finance Minister Guido Mantega declared the world’s central banks were engaged in a currency war – a race by countries to drive down the value of their currencies to help boost their economies through exports. Ever since he uttered the phrase, the global effort to break free of the financial crisis has been draped in a metaphor of conflict.
The rhetoric shows signs of heating up again, amid forceful moves by major central banks to pump up their economies through the creation of new money. The U.S. Treasury Department said Friday in a report that China’s currency is “significantly undervalued” and that it would “closely monitor” Japan’s aggressive new monetary policy to ensure the goal was economic growth, not a weaker yen. The globe’s finance ministers and central bankers will gather in Washington next week for the semi-annual meetings of the International Monetary Fund. Currencies are sure to be a hot topic.
The invocation of a “currency war” is provocative because it is a reminder of the 1930s, when nations consciously devalued their currencies, leading to a barrage of “beggar-thy-neighbor” policies that stifled global trade, contributing to the Great Depression.
But the war imagery is also unhelpful. It makes calm debate about difficult policy decisions nearly impossible. And almost everyone who is in a position to know believes the war is a myth. “I’ve never liked the ‘currency war’ concept. It engages in hyperbole,” Robert Zoellick, the former World Bank president, said last week at a conference hosted by the Peterson Institute for International Economics, a think tank based in Washington. Although the event was held under the rubric of a “currency war,” the only time the phrase was uttered was to dismiss it as a reflection of reality.
“I don’t think there’s a currency war,” Alberto Musalem, a managing director at Tudor Investment Corp., a Greenwich, Conn.-based hedge fund company that manages more than $11-billion (U.S.) in assets, said at the conference. “I don’t see a deliberate attempt to devalue.”
Foreign exchange markets are shifting. Currencies such as the Canadian dollar are suddenly havens for investors and currencies such as the Thai baht are a play for yield. The primary reason is the growth-seeking, zero-interest, money-creating policies of the United States, Europe and Japan.
Canada, Thailand and others are suffering as a result. If that isn’t war, what is it?
It is more accurately a game of survival in the post-crisis global economy where old formalities no longer apply. The policies of the U.S. Federal Reserve, the Bank of Japan, the Bank of England and others look aggressive because they appear to break the rules. These central banks have created the equivalent of trillions of dollars. What else could this be but a blatant attempt to debase their currencies to give their exporters an advantage in international markets?
If you accept that view, then you think most every policy maker on the planet is a liar, and you deny the validity of an overwhelming body of evidence that concludes that the policies of the Fed and others are doing more good than harm. Even the central bank of Brazil has concluded that its exporters benefit more from stronger growth in the United States than they are hurt by a stronger currency.
The world economy is stuck in purgatory between recession and recovery. The objective of each player is to escape, but none knows quite how to do it. This isn’t a state of war: Nothing is gained by attacking an opponent outright.
But there is an element of survival of the fittest. Countries will do what they can to revive their economies. The contest is complicated by the fact that a handful of players are considerably stronger than the others. But countries have no choice but to play the game.
The world’s major economies spent heavily and reduced interest rates as low as possible to avoid a global depression. Yet there still are 15 million more people unemployed today in the world’s advanced economies than in 2007. With all traditional means of stimulating economic growth having been exhausted, players must be creative and come up with new ways to return employment to pre-crisis levels.