Currency ‘war’ is the new catchphrase setting the current international financial and economic processes on fire. But many nations, and of course governments, are struggling to determine their position on this war.
To start with, it is necessary to delve into the nature of this war, before taking a view on the course of its development to secure and salvage our own national interest. And, it is also pertinent to define ‘national’ as opposed to the narrow interest of a select few.
The deeply polarising discourse confirms the skepticism that many of us shared over claims about the recovery from the deadly blows of a global economic recession that followed the global financial meltdown. The valuation of national currencies is the sovereign function of a nation state. The tendency of nations to keep their currencies depreciated relative to other currencies arises from the inclination to accrue benefits from larger exports which, in turn, reflects in higher output and employment figures.
Now the need for taking recourse to such an approach gains greater momentum in a situation characterised by sluggish or virtually no growth in the overall aggregate global demand. It is in such a context that a nation has to opt for keeping its currency depreciated to corner a greater proportion of global demand relative to other nations and economies. Therefore, currency war is often referred to as a trigger for ‘beggaring thy neighbour’. The raging debate on this so-called war is a clear admission that the recovery from the recession is far from complete.
Data on employment and savage cuts on social security in developed countries have established this. But since there was an election underway in the US before the G20 summit in Seoul, “blaming the other” was very much on the cards.
What is the US claim? The gurus of the Anglo-US brigade claim that the currency war is the outcome of the policies of newly emerging economies — particularly China and some other Asian countries, including India. They say that the imbalances in the global economy arise from the US’s massive current account deficit, coupled with current account surpluses of China and other emerging economies. This results in flight of capital away from crisis-hit deficit economies.
This could be prevented if China allowed its currency to appreciate. But by refusing to do so, China has encouraged this flight and piled up its foreign exchange reserves. So, China is the sinner — and there is a call for retribution. Nobel Laureate Paul Krugman has led the war cry of launching a trade war against China and imposing penal tariffs against Chinese exports.
That there is very little chance of achieving a consensual approach among the developed economies is clear. Economies like those of Germany and Japan, which clock a surplus, do not share this approach of the US. For example, Japan is one of the biggest beneficiaries of the Chinese economic situation and, therefore, does not share this acrimonious approach of the Obama administration.
The other issue pertains to the non-tenability of such unilateralism. Even if China allows its currency to appreciate, it will obviously respond by adjusting its domestic policies with a greater emphasis on government-led domestic spending. Will those mandarins of the Anglo-US brigade, who are up in arms against any sign of expanded government intervention, be in a position to accept such a course of Chinese intervention?
And then there is a question of history. The genesis of the current managed exchange rates started with the US abandoning the dollar’s link to gold. This made the dollar the most preferred currency of exchange. This advantage allowed successive US administrations to build deficits that have now reached unsustainable limits. The consumption of cheap imports and the housing bubble also contributed to the present predicament of the US economy. The cost of the first was loss of manufacturing jobs.
The second has drawn the US economy into a recessionary crisis and sent shock waves through the entire global economy.
So, ideally, this should have been a time for introspection, not for hurling threats about waging currency wars. The imbalance is a reality. But it is a result of past policies. It can be corrected by revisiting some of the basic policy prescriptions that have guided the course of the global economy for the last four decades.
Meanwhile, claims and counterclaims will excite the world.
Columnist Martin Wolf claims America is going to win the currency battle and the Chinese economic commentator, Yiping Huang, rebutted him saying the “US would lose a currency war”. This reflects the Chinese mood today. The currency war is a rhetorical war born out of a desperate US administration trying to gloss over past follies. A more realistic view would help the US play a much humbler role in the emerging multi-polar economic and financial world.
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