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Global Crisis/Innovation Blog

Currency War?  Not Quite Yet!

By Shlomo Maital

 America’s economy, now on Fed life-support, is growing but not producing jobs.  Ordinary Americans think the Obama Administration has wasted billions of its hard-earned taxpayer money on fruitless bailouts and will likely punish the Democrats in the Nov. 2 mid-term elections.   Obama and Treasury Secretary Tim Geithner have found someone convenient to blame: China.  China is manipulating its currency, they say, keeping it excessively weak to foster exports.  The resulting war of words has threatened a worse war, a War of Currency – with nations competing to devalue, or under-value, their exchange rates, to protect their exports and competitiveness.  Geithner’s Treasury Dept. was due to issue in April a bi-annual report on currency policies of nations with which America trades.  It was feared this report would formally accuse China of currency manipulation. The last time this happened was in 1994, under President Clinton.  At that time, nothing was done to implement the report. And since then China has piled up a huge mountain of dollars, $3 trillion worth, to keep the yuan from appreciating. 

    The Treasury report has been repeatedly delayed. It will not appear until after the crucial G20 meetings in Seoul, Korea, on Nov. 11-12.  Meanwhile, China’s export surplus with America was $28 b. in August alone; in that month America’s trade deficit soared 8.7 percent, to $47 b. Note that over half was in trade with China.  Trade deficits imply that when goods are imported, jobs are exported, specifically to China.  And jobs are THE political issue right now. 

    A Currency War means a rapid fall in the dollar.  This is in nobody’s interest.  World trade and capital flows require a stable currency.  There is no replacement in sight for the dollar; some 80-90 per cent of foreign exchange transactions today are in dollars.  With China restricting yuan transactions, the yuan is many years away from being a true global money.   America says China is responsible for global imbalance and must strengthen the yuan, from 6.8 per dollar to, say, 3.5.  China says America is the problem, endangering Asia by flooding the world with dollars through the Fed’s “QE” quantitative-easing policy.  Both, of course, are right.

    Sometimes, wars break out by accident.  This was largely the case with World War I and II. In World War I, a random assassination of the Archduke was the spark. In World War II, it was Hitler’s blind miscalculation. A currency war could break out.  But the fact that such a war would be lose-lose may hopefully deter the adversaries from starting it. Let’s hope a consensus solution to global imbalance and rebalancing will be crafted in Seoul.

    For innovators:  Innovation occurs within the context of global markets.  As innovators zoom in on the DNA of their inventions, they must let one eye zoom out and track global developments, such as currency realignment.  If I were an innovator, I would work out a worst-case scenario, or contingency plan, for the event that currency wars do break out and the dollar drops precipitously against other currencies. 


Blog entries written by Prof. Shlomo Maital

Shlomo Maital
October 2010
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