Currency War! What is it good for?
But what is a currency war, how do you win it and what are the spoils? And how can you even tell when you’re in one – particularly when the current accusations being flung back-and-forth across the pacific have to be examined within the context of a bizarre new political climate in which everything may or may not be as it seems.
The idea of a ‘currency war’ dates back to 2010, when Brazil’s finance minister Guido Mantegna coined the term as a descriptor for competitive devaluation taking place between the US and China, and – to a lesser extent – Japan. The dramatic phrase caught on instantly, and was immortalised in this extraordinary and educational Taiwanese battle rap animation.
The economic dynamics described within have been bubbling under the surface ever since. Now, dashing mega-president Donald “Measured Response is my Middle Name” Trump kicked the conjecture up a notch in a January interview with the Wall Street Journal, reservedly exclaiming that American “companies can’t compete with [Chinese companies] now because our currency is too strong. And it’s killing us.”
Cue debate for whether Trump is planning to abandon the US’s hitherto strong-dollar economics in favour of a new era of expansionist monetary policy deliberately geared towards lowering the value of the USD.
What’s the upside? The idea is that low currency values make exports cheaper relative to those of other countries’, thereby creating demand for domestic products, stimulating business and boosting economic growth. This is sound economic strategy, albeit flying in the face of the G20’s gentleman’s agreement to eschew policies designed to manipulate exchange rates for competitive reasons.
‘So what?’ some might say. China have long been accused of deliberately devaluing their own currency to that very end (an accusation they strongly deny), and now POTUS is simply playing them at their own game (or, at the very least, is pretending to).
What’s the downside? For one thing, the more a country devalues its currency, the more it drives up the price of importing goods (e.g. food or oil) from other countries. Further to that, the losing side in a currency war will see their domestic businesses suffer as consumers rush to buy cheaper goods from abroad.
On an even larger scale – and we can see this very clearly today – the idea of a currency war creates very uncertain, highly volatile currency markets which make conducting business a precarious and stressful endeavour for SMEs involved in cross-border sales and purchases. And so the G20’s stated aim to promote global financial stability in the wake of the 2008 financial crisis risks being cast aside.
There will always be those who seek to foster economic uncertainty for their own financial gain, as anyone who has received a cold call or misleading advice from a broker in the run-up to big data releases can attest.
All we can do is look for the tools and options that will allow us to navigate uncertain times in the most straightforward, transparent and cost-effective way possible.