Money, Currency Competition


National currencies are used to compete against each other. The reason to do this is to keep macroeconomic balances in favor of exports, while keeping imports at bay. In order to achieve this economies and particularly central banks implement currency devaluation by decree. Next, the Wikipedia article on competitive devaluation (Currency wars).

“Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets. However, the price increase for imports can harm citizens' purchasing power. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.”

The article states that, the event is rather rare, but in recent years:

According to Guido Mantega, the Brazilian Minister for Finance, a global currency war broke out in 2010. This view was echoed by numerous other government officials and financial journalists from around the world. Other senior policy makers and journalists suggested the phrase “currency war” overstated the extent of hostility. With a few exceptions such as Mantega, even commentators who agreed that there was a currency war in 2010 generally concluded that it had fizzled out in mid-2011.

States engaging in competitive devaluation since 2010 have used a mix of policy tools, including direct government intervention, the imposition of capital controls, and, indirectly, quantitative easing. While many countries experienced undesirable upward pressure on their exchange rates and took part in the on-going arguments, the most notable dimension of the 2010-11 conflict was the rhetorical conflict between the United States and China over the valuation of the Yuan. In January 2013, measures announced by Japan which are expected to devalue its currency sparked concern of a possible second 21st century currency war breaking out, this time with the principal source of tension being not China versus the US, but Japan versus the Eurozone. By late February, concerns of a new outbreak of currency war has been partially allayed after statements from the G7 and G20 groups of nations made commitments to avoid competitive devaluation.1)

Currency war is the daughter of mercantilism

Mercantilism is an economic theory from the perspective of exporters, protectionists, politicians, and money hoarders, and its primary beneficiaries are big business and big government. Basically, the more goods you sell outside your country and the more gold and silver you bring in and store safely in your vaults, the better. The corollaries are that exports are good, imports are bad, a weak currency is wonderful, and trade surpluses are the bees' knees2)……

……One mercantilist action available to a country like the United States is to devalue its currency, which simultaneously makes its exports cheaper and its imports more expensive. This may sound logical, but this tenet of mercantilism is counterproductive. If you have dollars in your wallet and I have yen, wouldn't you be upset if your dollars became less valuable and you grew poorer relative to me? Can you imagine anyone celebrating a decline in the value of his or her assets?3)

Mechanism for devaluation

A state wishing to devalue, or at least check the appreciation of its currency, must work within the constraints of the prevailing International monetary system. During the 1930s, countries had relatively more direct control over their exchange rates through the actions of their central banks. Following the collapse of the Bretton Woods system in the early 1970s, markets substantially increased in influence, with market forces largely setting the exchange rates for an increasing number of countries. However, a state's central bank can still intervene in the markets to effect devaluation – if it sells its own currency to buy other currencies then this will cause the value of its own currency to fall – a practice common with states that have a managed exchange rate regime. Less directly, quantitative easing (common in 2009 and 2010), tends to lead to a fall in the value of the currency even if the central bank does not directly buy any foreign assets.4)

A third method is for authorities simply to talk down the value of their currency by hinting at future action to discourage speculators from betting on a future rise, though sometimes this has little discernible effect. Finally, a central bank can effect devaluation by lowering its base rate of interest, however this sometimes has limited effect, and, since the end of World War II, most central banks have set their base rate according to the needs of their domestic economy.5)

Theoretical consequences of competitive devaluation

Real people may die when countries engage in “currency wars.” Countries debasing their currencies risk, amongst others:

Loss of competitiveness

The illusory benefit of a weaker currency is to boost corporate earnings as companies increase their exports. That may well be true for the next quarterly earnings report, but ignores that their competitive position may be weakening. The clearest evidence of this is the increased vulnerability to takeovers from abroad. As the value of the U.S. dollar has been eroding, for example, Chinese companies are increasingly buying U.S. assets. The U.S. is selling its family silver in an effort to support consumption6).

Social unrest

Currency debasement is not just bad for the corporate world: it’s particularly painful for citizens. Just ask citizens of Venezuela where the government just announced a 32% devaluation in the bolívar’s official exchange rate to the dollar. An overnight move of that magnitude is immediately noticeable, as are the negative effects on consumers, whereas gradual debasement in currencies of advanced economies are less noticeable, but ultimately have the same effect. The natural consequence of currency debasement is inflation, i.e., loss of real purchasing power; the two forces meet at the gas pump7).

The REAL worth of a currency

Is curious how financial advisors have a set of measures to observe, which are different than those used by most of us, when judging the strength of some currency. Albert Phung writes about this issue at “The fact of the matter is that looking at a currency's worth relative to that of another currency at a static point in time is meaningless; the best way to judge a currency's worth is to watch it in relation to other currencies over time. Supply and demand, inflation and other economic factors will cause changes to a currency's relative worth, and it is this change in value that can be used to evaluate worth”.

Some History

Currency War in the Great Depression

During the Great Depression of the 1930s, most countries abandoned the gold standard, resulting in currencies that no longer had intrinsic value. With widespread high unemployment, devaluations became common. Effectively, nations were competing to export unemployment, a policy that has frequently been described as “beggar thy neighbour”. However, because the effects of a devaluation would soon be counteracted by a corresponding devaluation by trading partners, few nations would gain an enduring advantage. On the other hand, the fluctuations in exchange rates were often harmful for international traders, and global trade declined sharply as a result, hurting all economies.

The exact starting date of the 1930s currency war is open to debate. The three principal parties were Great Britain, France, and the United States. For most of the 1920s the three generally had coinciding interests, both the US and France supported Britain's efforts to raise Sterling's value against market forces. Collaboration was aided by strong personal friendships among the nations' central bankers, especially between Britain's Montagu Norman and America's Benjamin Strong until the latter's early death in 1928. Soon after the Wall Street Crash of 1929, France lost faith in Sterling as a source of value and begun selling it heavily on the markets. From Britain's perspective both France and the US were no longer playing by the rules of the gold standard. Instead of allowing gold inflows to increase their money supplies (which would have expanded those economies but reduced their trade surpluses) France and the US began sterilizing the inflows, building up hoards of gold. These factors contributed to the Sterling crises of 1931; in September of that year Great Britain substantially devalued and took the pound off the gold standard. For several years after this global trade was disrupted by competitive devaluation and by retaliatory tariffs. The currency war of the 1930s is generally considered to have ended with the Tripartite monetary agreement of 1936.8)

Currency War of 2009–11

From Wikipedia, the free encyclopedia9)

World statesmen such as Manmohan Singh and Guido Mantega suggested a currency war was indeed underway and that the leading participants are China and the US, though since 2009 many other states have been taking measures to either devalue or at least check the appreciation of their currencies. The US does not acknowledge that it is practicing competitive devaluation and its official policy is to let the dollar float freely. While the US has taken no direct action to devalue its currency, there is close to universal consensus among analysts that its quantitative easing programmes exert downwards pressure on the dollar.

According to many analysts the currency war had largely fizzled out by mid-2011, though others including Mantega disagreed. As of March 2012, outbreaks of rhetoric have still been occurring, with additional measures being adopted by countries like Brazil to control the appreciation of their currency. Yet by June, there were signs that currency misalignment had been leveling out in China and across the world, with even Mantega relaxing some of Brazil’s anti-appreciation controls. Alarms were raised concerning a possible second 21st currency war in January 2013, this time with the most apparent tension being between Japan and the Euro-zone.

Start 2009

Following the financial crisis of 2008 widespread concern arose among advanced economies concerning the size of their deficits; they increasingly joined emerging economies in viewing export led growth as their ideal strategy. In March 2009, even before international cooperation reached its peak with the 2009 G-20 London Summit Economist Ted Truman became one of the first to warn of the dangers of competitive devaluation breaking out. He also coined the phrase competitive non-appreciation.

On 27 September 2010, Brazilian Finance Minister Guido Mantega said that the world is “in the midst of an international currency war.” Numerous financial journalists agreed with Mantega's view, referring to recent interventions by various countries seeking to devalue their exchange rate including China, Japan, Colombia, Israel and Switzerland.10)

Considerable attention had been focused on China. For much of 2009 and 2010, China has been under pressure from the US to allow the Yuan to appreciate. Between June and October 2010, China allowed a 2% appreciation of the Yuan, but there are concerns from Western observers that China only relaxes her intervention when under heavy pressure11)……

Negotiations at the 2010 IMF meeting

……In the middle of October 2010, finance ministers congregated in Washington, D.C. for the 2010 annual IMF and World Bank meeting, which was expected to be dominated by talk of currency war. Just prior to the IMF meeting, the Institute of International Finance had called for leading countries to agree on a currency pact to aid the rebalancing of the world economy and to avert the threat of competitive devaluation. The meeting was held amid warnings that weaker exchange rates risk hurting the global economy, which was already vulnerable due to the Global financial crisis. There was concern about tit-for-tat protectionism at a time when the rate of increase in global growth was already slowing12)…..

……The IMF, urged most developed countries to boost exports, and for some emerging markets to enhance domestic consumption and to let their currencies appreciate. Dominique Strauss-Kahn said the IMF would highlight the linkages between economies as part of a “systemic stability initiative.” Its steering committee added that it should work on capital flows, exchange rate movements and the accumulation of capital reserves. Strauss-Kahn also said “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon…Translated into action, such an idea would represent a very serious risk to the global recovery…Any such approach would have a negative and very damaging longer-run impact.” Australia's Federal Treasurer, Wayne Swan played down rumors of a currency war saying global financial ministers were working in a coordinated way to deal with “exchange rate reform.” However, the opposition's finance minister, Andrew Robb, warned that with some countries deliberately devaluing their currencies other countries may retaliate thus causing a “trade war”, and he urged Swann to alert “all of these other major countries to the very damaging implications of a currency war.”13)……

2010 G-20 Seoul summit

Discussion over currency war and imbalances dominated the G20 summit. Attending leaders such as Britain's David Cameron made statements suggesting good progress had been made. Yet according to most commentators no substantial agreement was reached, with the US largely unable to persuade other nations to endorse the measures it considers necessary to rebalance the global economy. IMF managing director Dominique Strauss-Kahn said this particular summit was “more of a G20 debate than a G20 conclusion”.

The communiqué issued after the meeting did include a commitment to support enhanced monitoring so growing imbalances can be better identified, and to work on a possible future agreement for “indicative guidelines”14)……

Acknowledged consequences 2011

January 2011 saw new interventions to prevent currency appreciation and volatility from Brazil, South Korea and even from Chile – a country with a reputation for avoiding government intervention in favor of free market policies. Brazil's finance minister Guido Mantega who had raised the alarm about a currency war back in September, warned that matters were beginning to escalate into a trade war. He expressed concerns about the economic policies of both China and the US. By February, the US had stepped up diplomatic efforts to persuade emerging economies such as Brazil and India that China's intervention was the root cause of the currency war. However the US once again refrained from labeling China a currency manipulator.

March saw analysts from BNP Paribas report that the currency war had ended – governments of emerging economies were increasingly deciding to accept currency appreciation so as to mitigate rising food prices, one of the causes behind civil discontent driving the Arab Spring. In April, the Financial Times joined Bloomberg in reporting that the currency war was beginning to fizzle out, again suggesting a key reason was the trend for emerging economies to allow currency appreciation as a means to offset inflation. Although Brazil is one of the emerging countries that have recently abandoned intervening against appreciation, her finance minister Guido Mantegna disagreed with suggestions that the 'currency war' is over, saying it is still on-going. In an April interview with the Wall Street Journal, Mantegna spoke out against the loose monetary policies of advanced nations which have been aggravating inflation in emerging economies15)……


September, as part of her opening speech for the 66th United Nations Debate, and also in an article for the Financial Times, Brazilian president Dilma Rousseff called for the currency war to be ended by increased use of floating currencies and greater cooperation and solidarity among major economies, with exchange rate policies set for the good of all rather than having individual nations striving to gain an advantage for themselves.16)

Central banks

Is most interesting to know most economists understand the down sides of competitive devaluation, yet central banks keep using it. Lawrence H. White and George Selgin, write about the motivations to keep using this strategy.

“The chief weakness of central banks as currency issuers is their inability to bind themselves to their redemption promises. Their public monopoly status gives them immunity from the legal and marketplace sanctions that ordinarily prevent commercial banks from reneging on their commitments to honor their debts in full. A central bank enjoys “sovereign immunity” from claimholder lawsuits, and legal restrictions on the public's choice in currency mean that the central bank has little fear of losing customers for bad behavior. At the same time, central bankers—especially in developing countries—face political pressure to provide the short-run benefits that surprise monetary expansion can deliver (namely extra revenue to pay the government's bills, extra stimulus to the economy, or extra liquidity for the banking system). When devaluation is relatively costless, central banks are tempted to engage in expansionary monetary policies that ultimately force devaluation”17).

Modern events

Competitive devaluation in 2013

In mid January 2013, Japan's central bank signaled the intention to launch an open ended bond buying programme which would likely devalue the yen. This resulted in numerous senior central bankers and finance ministers warning of a possible fresh round of currency war. First to raise the alarm was Alexei Ulyukayev, the first deputy chairman at Russia's central bank. He was later joined by many others including Bahk Jae-wan, the finance minister for South Korea, and by Jens Weidmann, president of the Bundesbank. Weidmann held the view that interventions during the 2009-11 period were not intense enough to count as competitive devaluation, but that a genuine currency war is now a real possibility. Japan's economy minister Akira Amari has said that the Bank of Japan's bond buying programme is intended to combat deflation, and not to weaken the yen. Most commentators have asserted that if a new round of competitive devaluation occurs it would be harmful for the global economy. However some analysts have stated that Japan's planned actions could be in the long term interests of the rest of the world; just as he did for the 2010-11 incident, economist Barry Eichengreen has suggested that even if many other countries start intervening against their currencies it could boost growth world-wide, as the effects would be similar to semi-coordinated global monetary expansion. Other analysts have expressed skepticism about the risk of a war breaking out, with Marc Chandler, chief currency strategist at Brown Brothers Harriman, advising that: “A real currency war remains a remote possibility.”18)

Other uses for “currency war”

It is interesting. The term “currency war” is sometimes used with meanings that are not related to competitive devaluation, in some way they mean quite the opposite concept19).

In the 2007 book, Currency Wars by Chinese economist Song Hongbing, the term is used to refer to an alleged practice where unscrupulous bankers lend to emerging market countries, and, then speculate against the emerging state's currency by trying to force it down in value against the wishes of that states' government.

In another book of the same name, John Cooley uses the term to refer to the efforts of a state's monetary authorities to protect its currency from forgers, whether they are simple criminals or agents of foreign governments trying to devalue a currency and cause excess inflation against the home government's wishes.20)

Concluding statements

I would like to point out some provocative statements about this strategy:

  • Those in charge of currency competition policies have enough understanding about these moves. Decision to go this path are not taken lightly. Whatever this means.
  • Central banks dominion over currency issuing, makes it easy to perform their currency strategy with astonishing precision.
  • Monies worth (at least in the short term) is NOT dependent on the strength of the economy or the production system, but on typical supply and demand rules set by the market.

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