Martin Wolf - on currency wars & US v China

[What are currency wars?]
"A set of policy preferences that don't fit together. People are in conflict. The governments in the developed world and the exporters in the emerging world. The US wants money flowing into the emerging countries and the emerging countries want to stop it [Amazing].

The Federal Reserve wants to expand the US economy. It doesn't want it to suffer from deflation which is falling prices, it wants inflation. It pursues expansionary domestic monetary policy. It pursues very low interest rates and in addition it prints money to buy bonds. The result is that money supply grows and capital flows out of the US. That buys foreign currencies pushing up the value of those currencies. The Fed gets what it wants, a weaker dollar [!]. A weaker dollar means higher domestic prices, less inflation, more expansion."




It may lead to less inflation but eventually this would be reversed and the dollar should strengthen.
Why? It is because the system contains its own adjustment mechanism. The prices of imported goods for example would become more expensive through a weaker dollar. The Fed would have to control the threat to its own citizens via rising fuel costs and so on. There would also be anticipation (particularly by foreigners) of an eventual interest rate rise to combat rising inflationary forces as well as possible stability problems that would eventually occur all else equal without any offsetting corrective policies.




"Of course the foreigners don't like this because although they get a higher exchange rate and their real income rises, their domestic producers become less competitive. They don't like this situation. Output is reduced and the trade balance worsens. You are shrinking production and you get a recession. That's what happens to Brazil [Absolutely].
Capital flows in but in the end it rushes out and they have a financial crisis."

[Who is going to win?]
That's an interesting question. I've argued that the US will win [Absolutely] one way or the other. The US has almost infinite firepower. The Federal Reserve can do what it likes.
To prevent the US getting the weak currency it wants, the emerging markets have to be willing to buy dollars without limit. The only government that has shown the appetite to buy dollars without limit is China [!]. Other countries can't do it because there is the real risk of generating inflation in their economies. China wants a stable currency at a competitive level so they can expand their exports and they don't have to rely on capital inflow. They bought $2.6trillion of foreign currency reserves and obviously most of it must be in dollars.

[Are currencies used as geo-political weapons?]
No that's very unlikely. The currency is too important for the domestic economy. If you are using a currency to damage someone else by reducing its value you also reduce the value for your domestic citizens.




Here's the thing. That is exactly what the Federal Reserve and the US government has done. Mr Martin Wolf doesn't go far enough in his theory of currency wars.
The US leveraged the global system through a weaker dollar to protect their exports (I won't describe exactly how, that's my own theory).
But as of September 2011 they are allowing the dollar to strengthen once again.

I think they are trying to bring down the $ Gold price to make it more reflective of the true value of the dollar. They've played the loosening game for long enough, now it's time to control the Gold price. This is scary because Gold is actually increasing in value in other currencies but because it is denominated in USD it is actually falling in value....

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[LILCISCO1604]

i agree with the video we have reduced there money value we got those fuckers man yeaahhh fuck the the china government and the the inocent people who lives there

[SirHungryHippo]

@MrNChoudhury yeah, its unfortunate that the world has come to this. The best we can hope for is that there wont be a violent confrontation like in the cold war.

A weakened and jealous america is far more dangerous than a happy america.

[MrNChoudhury]

@SirHungryHippo

I like your analogy. America's objective is quite clear to me: it is to borrow against the global financial system itself through the dollar's continued role as world reserve currency. But it's not as simple as you may think. They are panicking - China continues to grow while they are stagnating / growing more slowly. At some point if America doesn't get back on track with its economy it won't be able to shoot anyone without help from the outside.

[SirHungryHippo]

@trooper258 great strategy!

borrow as much as you can from a rich guy, right before you shoot him between the eyes! wonderul!

america military strategy is so simple: it is reminiscent of a robbery

[MsH1h1h1h1]

@imminent46 lol u funny

[MrNChoudhury]

@karimrakha

Russia is tricky. I actually think China will side more with India because the Chinese think they can have more of an upper hand in that relationship.

I am not sure about Africa - the Chinese are trying to harness raw materials supply from that part of the world but they may have enough stockpiles given depressed world demand and internal troubles.

Britain may side more with Canada in the trade war. I'll upload David Cameron's speech to the Canadian Parliament later today.

[karimrakha]

@trooper258 and what if u lose the war ? and 100% sure russia will allie with china ....so u ll have to fight these 2 giants at the same time wake up ur not that strong anymore actually ur days are numbered

[trooper258]

Fuck China. I think we should figure out a way to go to war with them. Bomb their country and then erase our debt by rebuilding their country back up.