A global currency war is brewing. So far, it has received little attention in Canada. But, as Finance Minister Jim Flaherty has acknowledged, it threatens to destabilize this country’s still-shaky economy.
In fact, it already has.
Over the weekend, finance ministers from the G20 nations meeting in South Korea agreed that this war — which takes the form of countries deliberately trying to hold down the value of their own currencies in order to encourage exports — would ultimately harm everyone.
But they couldn’t agree on how stop it.
Already, at least six countries have engaged in some form of competitive devaluation. Thailand, Brazil and South Korea have set up — or threatened to set up — barriers to short-term foreign capital entering their countries.
The fear here is that inflows of this “hot money” are driving the currencies in these countries to levels that make their exports uncompetitive in the rest of the world.
For the same reason, Japan has intervened directly in foreign exchange markets as it tries to keep the yen, down.
But the real culprits in this currency race to the bottom are the U.S. and China.
Terrified by the spectre of mass social unrest, China’s ruling Communists see exports as a political necessity.
Selling goods to the rest of the world keeps China’s factories humming and its workers more or less content. And keeping China’s currency pegged to the U.S. dollar at an artificially low rate ensures that these exports can be sold the world over at low, low prices.
That, in turn, puts pressure on other exporting nations like Japan to keep their currencies low.
The U.S. also faces a political problem. In that country, attempts to reduce unemployment through increased government spending are now politically impossible. The Tea Party movement and its various spinoffs have seen to that.
This leaves Washington with only one way to boost the economy: having the Federal Reserve (the United States’ central bank) quietly print money.
But this so-called quantitative easing, and the record low interest rates associated with it, are driving short-term capital from the U.S. to other countries — which raises the value of their currencies and makes their exports less competitive.
This is what has happened to Canada. America’s deliberate devaluation and the resultant near-par loonie have already cost Canada manufacturing jobs.
Brazilian finance minister Guido Mantega has openly accused America of waging a “currency war.” Despite the weekend’s G20 agreement in principle, his country and others remain committed to what they call defensive measures.
So far, Canada remains reluctant to join in. As Flaherty said Sunday, competitive devaluation — like competitive tariff increases — threaten to damage the international trading economy upon which this country depends.
But in the end, we may not have much choice. Optimists look to the G20 leaders meeting in South Korea next month to come up with a workable currency truce. But as this summer’s divided Toronto summit showed, the international economic consensus that was so powerful in 2008 is quickly evaporating.
Certainly, the U.S. shows no sign of trying to staunch the capital outflow that keeps pushing its greenback down. This week, for the first time in history, it put on sale negative-rate government bonds — in effect asking investors to pay Washington for the privilege of lending it money.
As the currency war heats up, that’s not going to help.
Walkom
In fact, it already has.
Over the weekend, finance ministers from the G20 nations meeting in South Korea agreed that this war — which takes the form of countries deliberately trying to hold down the value of their own currencies in order to encourage exports — would ultimately harm everyone.
But they couldn’t agree on how stop it.
Already, at least six countries have engaged in some form of competitive devaluation. Thailand, Brazil and South Korea have set up — or threatened to set up — barriers to short-term foreign capital entering their countries.
The fear here is that inflows of this “hot money” are driving the currencies in these countries to levels that make their exports uncompetitive in the rest of the world.
For the same reason, Japan has intervened directly in foreign exchange markets as it tries to keep the yen, down.
But the real culprits in this currency race to the bottom are the U.S. and China.
Terrified by the spectre of mass social unrest, China’s ruling Communists see exports as a political necessity.
Selling goods to the rest of the world keeps China’s factories humming and its workers more or less content. And keeping China’s currency pegged to the U.S. dollar at an artificially low rate ensures that these exports can be sold the world over at low, low prices.
That, in turn, puts pressure on other exporting nations like Japan to keep their currencies low.
The U.S. also faces a political problem. In that country, attempts to reduce unemployment through increased government spending are now politically impossible. The Tea Party movement and its various spinoffs have seen to that.
This leaves Washington with only one way to boost the economy: having the Federal Reserve (the United States’ central bank) quietly print money.
But this so-called quantitative easing, and the record low interest rates associated with it, are driving short-term capital from the U.S. to other countries — which raises the value of their currencies and makes their exports less competitive.
This is what has happened to Canada. America’s deliberate devaluation and the resultant near-par loonie have already cost Canada manufacturing jobs.
Brazilian finance minister Guido Mantega has openly accused America of waging a “currency war.” Despite the weekend’s G20 agreement in principle, his country and others remain committed to what they call defensive measures.
So far, Canada remains reluctant to join in. As Flaherty said Sunday, competitive devaluation — like competitive tariff increases — threaten to damage the international trading economy upon which this country depends.
But in the end, we may not have much choice. Optimists look to the G20 leaders meeting in South Korea next month to come up with a workable currency truce. But as this summer’s divided Toronto summit showed, the international economic consensus that was so powerful in 2008 is quickly evaporating.
Certainly, the U.S. shows no sign of trying to staunch the capital outflow that keeps pushing its greenback down. This week, for the first time in history, it put on sale negative-rate government bonds — in effect asking investors to pay Washington for the privilege of lending it money.
As the currency war heats up, that’s not going to help.
Walkom
