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Ongoing Currency War

While Syria and Ukraine have the world worried about war, a much cooler war continues across the world.  This is the one fought not with bullets or missiles, but instead with big wads of cash.  The currency war that has swept the globe since 2008 is continuing on many fronts, as we have discussed before.

It’s time for an update.  Who is winning the currency war?  Right now, the answer appears to be Japan, but China has more than a few tricks it is working on.  Europe remains a big loser and the US is pretty much holding even.

The presses keep rollin'

The presses keep rollin’

A currency war is what breaks out when nations start deliberately devaluing their money by printing it and running deficits.  They do this in order to make their exports appear cheaper around the world.  Think of it as a jobs program, something that has been very popular during the depression that has gripped the globe.

The net effect is similar to tariffs and other barriers to imported goods, except life is generally better for the average working person, as we’ve discussed before.  There are two problems with this plan, however.



The first comes when all the money around starts to be come worth much less at home, causing prices to rise with inflation. At first inflation seems like a tax on the wealthy who have a lot of money, forcing them to put it to use.  With time, however, inflation becomes large and hurts everyone while the rich put what wealth they have overseas.

The second problem arises when every nation starts to trash its own currency for a competitive advantage, setting off a currency war.  That is happening across the world.

The big leader in this is Japan, which has lowered the value of the Yen by 19% since Prime Minister Shinzo Abe took office a bit over a year ago.  While unemployment is down and Japan seems to be out of the doldrums it was in for 20 years, the clouds are already gathering on the horizon.  Inflation in Japan is starting to pick up and workers are demanding more money all the time, keeping the cycle going.  “Abenomics” is working, so far, but it can’t keep on forever.

Coming off of Japan’s devaluation is a Chinese devaluation of their own Yuan, which is proceeding at a typically Chinese pace – carefully and mysteriously.  The central government has recently announced that the Renminbi (People’s Currency) will fall, but also become more openly traded in world markets – along with internal reforms.  Rather than simply print more, the Chinese government hopes to become a “Reserve Currency” or the money that people around the world use to pay their bills.  The two plans appear to go against each other, since being a reserve currency increases demand and drives the value of a currency up.  Everyone will have to keep watching China to see what they do.


The Euro tries to remain flashy and cool.

Through all this the European Central Bank (ECB) has refused to worry about exchange rates, acting instead to bolster confidence in the central currency that had to weather a lot of storms over the last few years.  As a result, it is up 12% against the US Dollar over the last year, now at $1.37.  It makes no sense at all, and Europe is not creating desperately needed jobs.  By standing by while the currency war circles the globe, Europe is losing.

Other big losers include Argentina, Venezuela, and Turkey, which have all been hit with massive inflation that has destroyed their economies.  They played the same game Japan did, but haven’t been able to pull it out at the last minute as you are supposed to.  The problem with printing a lot of money is that the economy becomes addicted to it.  Argentine and Venezuelan money wound up in Miami, seeking the safety of the US, as everyone else gradually becomes poorer.

Which brings us to the big player in the currency war, the US.  As Brazil famously noted back in 2010, we have consistently had “cheap money” policies that have kept interest rates at zero and included $85B per month in “quantitative easing”.  This is far below what the Fed should have targeted for economic growth.  Why hasn’t inflation taken off?  In part, the cheaper goods from Japan and China are keeping it in check for us, as has the discovery of a lot of oil here in the US.  We have been free to print as much money as we want and largely keep pace in the currency war without suffering any consequences.  Yet.

Who will win the global currency war?  In the end there may be only losers if everyone keeps practicing the fine art of creating jobs by running the presses.  What we do know is that there has to be a new global currency regime at some point if this keeps up.  So far, only China seems to have an eye towards that.  So if you want to place your bets they have to be the favorite.

24 thoughts on “Ongoing Currency War

    • It only really works for developing nations on the fast track – as Japan was in the 60s, China in the 90s, etc. I think they all have to hit the wall once they start to hit the big leagues. The experiment in Japan right now is probably doomed, but it’s been a good ride so far.

    • No, they aren’t. They probably should be, based on what I have seen. The Euro at $1.37 has to be killing them. They have a deflation problem, too, which is to say imports are getting cheaper all the time.
      The Germans are still running the show, and they seem to just love austerity. Perhaps they will be proved right in the long run.

  1. One reason interest rates should not be raised and quantitative easing not be reduced is because of per capita gdp. Per capita decreased during the recession and has returned to pre recession levels only since 2012.


    That has been a great loss in standard of living given the positive increases in the CPI since the deflation of the recession.


    The Mankiw rule is interesting but I’m glad the Fed has applied it religiously. The
    unemployment rate is historically high and the tragedy of unemployed people is that that can’t be recovered. You can always use unused physical inputs in the future–they aren’t wasted.

    Even if China cheats a bit on the currency it doesn’t matter. They can only do it so much because internally a company still has to pay for inputs used to make the products. They need to maintain TR=TC. We trade with China to help ourselves and China. After all China, per capita, is still poor. And a China that get wealthier will someday have representative government and a multi party system and by then, the United States will have triumphed again because told the world that Communism was not the way to go.

    • I hate to criticize the Fed because they are the only ones actually doing something. QE3, or the $85B/mon in mortgage bonds, is really a jobs program. Congress wouldn’t make one so the Fed did the best they could.

      I also agree that the inflation target of 2% seems to be a good one for keeping the US Dollar from falling out of line on Foreign Exchange, so they are apparently doing the right things so far.

      I do worry about China largely because they are far more strategic than we are. We are so short-term focused by comparison. I am not terribly worried about exporting our wealth to them, but — I feel that there are fewer jobs for working people here as a result and over in China a small number of rich get richer while they work the nation like slaves and pollute it.
      Yes, that should even out eventually. I’d like it to even out sooner rather than later, and I’d really like it to happen before they acquire real power.

  2. Correction

    The Mankiw rule is interesting but I’m glad the Fed has not applied it religiously.

  3. Since you stated your view on China rather plainly, you did make me sit up and take notice.

    According to a St. Lous Fed article (I think it was in their research journal), they pointed out that some of what we import from China are intermediate goods that get further processed here in the US and exported. Also I think the stats may show that China runs a trade deficit with other Asian nations, so China has been losing manufacturing jobs too.

    I don’t know. China is sort of a partner and it is a competitor. I suppose the US should copy them if they have areas of superior policies and results.

  4. Click to access ecbocp142.pdf

    Erik, check out page 17 of the above report. It has an explanation why the consumption level in China is too low.

    Also there’s a chart on that page showing 3 time periods where real interest rates have been negative in China.

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    • I’m glad this issue is finally getting some attention, but that is old data. Jan 2010 was the low point for jobs all around, and things were very desperate then. The unemployment rate for 20-24 year olds is down to 11.9% – still very high by any measure, but improving. It was slower at improving than the overall unemployment rate from 2010-2013, but finally showed some movement last year. I suspect it’s because the hiring that was going on was largely to fill very specific needs and people with experience that allowed them to hit the job at top speed on day one were getting the work before kids right out of school.

      I don’t doubt that a lot of people are taking any damned job they can find at this point in this environment. Opportunities for the young are still nowhere near where they need to be, IMHO.

      At any rate, the improvement is happening but it’s very, very slow. I don’t think we can say we are really “recovering” until the 20-24 unemployment rate hits its longer-term trend of about 7%, which at this rate appears years away.

      I think this stat is very much worth watching, as we did through 2013.

    • That is a big number, but I think it’s a bit too high. This is a reflection of the U6 unemployment number, which counts everything including not having enough hours, given up looking for work, etc. It’s still at 13.1% overall, and that’s a tragedy.
      I suspect that to get to the figure they are using they are including men voluntarily out of the workforce such as in school, raising the kids, etc, but the figure for workforce participation overall for men 25-54 was 88.7% in 2012.
      That’s more like 1 in 8 overall, and some are indeed voluntarily not working. I wish U6 was broken down by age and gender (anyone have a link?) but it’s probably more on the order of 1 in 10.
      So I can’t make sense of where they get that number.

    • I agree generally, which is why I support an infrastructure initiative.
      This is very interesting, and thanks for it. The gap between current GDP and “potential” was highlighted by the CBO recently, and I have to admit I don’t understand it. Id like to know more about what goes into that calculation. But what I see in the link you sent is that the gap is really huge, and that is reasonable after the harsh downturn. The CBO claimed that we should make up the difference by 2022, which seems really odd to me.
      As for Krugman’s piece, I generally agree except for two things – there are deficit issues in outlying years (as he notes, but discounts) that we should address now, and the velocity of the US Dollar is still very much in the toilet, something that suggests it’s not a money supply problem but a more structural issue that is harder to address with simple stimulus.
      But with caution and a better accounting for ongoing expenditures versus capital I think we can manage whatever problems we have and yes, let’s do a lot more to grow the economy into the debt we have accumulated already!

  6. You are certainly right about money velocity.

    Economists always talk about stocks and flows. Just look at these metalworking machinery
    stats and see the recessionary drop off.

    Click to access 12s1030.pdf

    It would be interesting to see how much is exported and how much is for domestic use.

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