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Let slip the dollars of war Add to ...

When G20 finance ministers and central bankers gather Friday for two days of talks in the touristy South Korean coastal city of Gyeongju, it will be against a backdrop of growing global tensions. Like most of us facing tough economic times, what countries do with their money is at the heart of the trouble.

Some are keeping exchange rates artificially low, either by selling huge amounts of their currency or printing more. Others are awash in other people's money, which threatens to hike prices of financial assets, triggering inflation and wreaking havoc on their economies. What they have been doing - or threatening to do - to protect themselves runs the gamut from provocative - but legal - to downright dirty.

So far, most of the shots fired in the Great Currency War of 2010 have been verbal, especially between the two main combatants, the United States and China. But Japan, Brazil and a dozen smaller countries caught in the crossfire have been dusting off their weapons. And as they plot or deploy such defensive tactics as direct intervention in the foreign exchange market, deliberate devaluation and curbs on capital inflows, the risks rise that the shouting will turn into shooting, with potentially devastating consequences.

Mervyn King, Governor of the Bank of England, warned this week of the danger that some countries could turn to protectionist retaliation if the tension escalates: "That could, as it did in the 1930s, lead to a disastrous collapse in [economic]activity around the world."

The finance ministers will undoubtedly leave South Korea with a public commitment to avoid shafting each other to protect their own national interests. Their pledge will be worth about as much as a politician's promise in an election campaign if the leading currency culprits continue to behave badly. The we're-all-in-this-together spirit that helped revive global fortunes after the near collapse of the financial system in 2008 is long gone.

The friction has been building for months, but it took Brazil's outspoken Finance Minister, Guido Mantega, to declare last month that actual hostilities have broken out.

The problem, explained Mr. Mantega, is that some countries have chosen to deliberately cheapen their currencies to make exports more competitive. Their intention, he declared, is to revive their economic fortunes at the expense of faster-growing emerging countries like his own. There is little doubt he was pointing at Washington, poised to launch another round of what central bankers call quantitative easing and the rest of us call flooding the market with money.

A bigger worry is that investors fleeing a cheapened U.S. dollar, Japanese yen or Swiss franc will pour money into booming Brazil and other expanding economies in amounts that will trigger dangerous inflation.

Some analysts insist that comparisons to the disastrous trade policies that paved the way for the Great Depression are far fetched. Others warn that hard economic times typically cause governments to circle the wagons. Protectionist policies are politically popular in times of high unemployment. And they may even work … until everyone else piles on.

"This isn't a currency war as much as a currency bar brawl," says Randy Cass, founder of Toronto-based analytical firm First Coverage. "These countries aren't thinking strategically about the long term and this isn't in the least about emerging victorious. Almost every country involved right now is just hoping to be less bloodied than the others when last call is shouted."

The leading players in this drama, China and the U.S., have long been on a collision course

. Washington berates Beijing for refusing to allow the market to determine the value of its yuan, and Beijing counters that the U.S. and other industrial countries are the authors of their own misfortunes.

Now, the U.S. is playing the Chinese game, devaluing to win back market share and stitch up its tattered economy. But because the Chinese have tied the yuan to the greenback, a cheaper dollar won't hurt Chinese exports.

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