Thursday, October 7, 2010

Currency Wars

In our last post we noted that Brazil's finance minister commented on a global currency war.  His comment has elicited an avalanche of international comment, including the IMF and World Bank.  We have been commenting for almost two years that a weak U.S. dollar is a burden on developing countries.  A weak dollar combined with low interest rates is economic warfare.  For some time Switzerland has been intervening to lower the value of the Swiss franc.  South Korea, Australia, Brazil, China, and recently, Japan, have, among others, bought U. S. dollars or otherwise taken action to protect its currency and control asset prices.  A weak dollar combined with low interest rates forces investments in growing countries which drives their currency and asset prices up.  The Chinese currency is known to be undervalued as well as pegged to the U.S. dollar.  Consequently, any appreciation of the Chinese renminbi is a devaluation of the U. S. dollar.

We have previously discussed Chinese and American military interests in economic warfare.

There have been numerous studies and articles on U.S. and Chinese imports/exports and the weak dollar and appreciation of the Chinese currency.  There does not appear to be any appreciable benefit to the United States for the renminbi to be appreciated in value with respect to either exports or jobs.  Any lost Chinese exports would go to other Southeast Asian countries and would most likely cause increased prices in the United States rather than increase internal production.  U.S. import levels are likely to remain as they are implying needed internal consumption within a slow growth economy.  Lost export jobs in China could conceivably be more disruptive as difficult rebalancing for internal service and production jobs from export, interest rates, and shift of income from corporations, finance, and real estate to households.

The verbal intensity of this issue runs the risk of masking the real problems within the United States and within China and how they are contributing to the global current account imbalances problem.  To a degree, there are always currency "wars"; it is only when they escalate into a mutually destructive tariff war or a currency crisis does it become a financial crisis conflict.


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2 comments:

  1. China treats us like a control freak abuser treats their victim of domestic violence "It's your fault. If only you keep quiet, I will change!" No way! These guys should never have been allowed into the WTO. Their nuns bought their way to Al Gore's heart. The CHinese Art Of War says everything is war by other means. Their objective is to destroy us by stealth. lying about it all the way. THis isn't racism - ask any Chinese who came here as a victim of Communism.

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  2. Re: “... a devaluation of the U. S. dollar.

    If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2010 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

    The October 7th metal value of these nickels is “$0.060639” or 121.27% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” at Coinflation.com.

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