The Currency Wars: Season 2

October 8, 2010

There is war brewing. The guns are primed, the sights set, and the enemy marked.  The soldiers are jittery, and the atmosphere explosive. A rash action by either party could trigger a ferocious war causing untold mayhem .

No , I am not talking about Israel standoff with Iran. I am talking about the currency wars which government officials of both China and US are preparing to fight.

The innocuous sounding “H. R. 2378 — Currency Reform for Fair Trade Act” was passed by the US House of Representatives  by a vote of  348 to 79 on 28th of September .  The bill calls for the US Department of Commerce to start imposing – even without approval by US President Barack Obama — punitive tariffs on certain countries. The initiative specifically targets countries that have “a fundamentally undervalued currency,” “persistent global current account surpluses” and very large currency reserves – in other words, China.

Ahead of the impending elections and faced with massive unemployment and sluggish economy, the US politicians are baying for Chinese blood. They want to put and end to the deplorable Chinese practice of currency manipulation, which makes Chinese exports cheaper and causes US industries to shut shop.

 

Unequal Competition

 

But the Chinese are in no mood to oblige. They are determined not to suffer the same fate as Japan of the 1980’s. Under US pressure the Japanese were forced to let yen appreciate. Within one year, the value of the yen had increased by some 60 percent. In order to balance out the negative consequences of the revaluation for the country’s export industry, the Bank of Japan lowered interest rates to nearly zero, thereby triggering a huge speculative bubble on the stock exchange and the real estate market. Even today, Japan has still not recovered from the prolonged crisis that ensued.

And then there are political considerations.  The Chinese government, which has long positioned itself as crusaders to restore Chinese glory, cannot afford to lose face in front of their domestic constituency by bowing to Chinese demands.

So I guess, the Chinese won’t do anything except a slow and gradual revaluation of their currency, which gives time to their export industries to adjust.

Uncle Sam can now either it its own words or proceed with sanctions. Under Republican pressure and increasingly being branded as a weak president, Obama cannot afford to do nothing.  He would  go for sanctions. And then we can kiss free trade and the recovery of the world economy goodbye.

It would be like the 1920’s and 1930’s. European powers bent upon reviving their sluggish economies indulged in protectionist policies that ultimately led to a deflationary cycle and ultimately the Great Depression.

There is a lot at stake, and I am keeping my fingers advised. In the meantime I am buying gold , I will advise you do the same.

 

Gold prices

 

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One Response to “The Currency Wars: Season 2”

  1. Magesh Kumar Says:

    excellent article Archit… another secret move of the US is gradual devaluation of the dollar… they have been doing this since 2007. The idea behind this is that they can get the better of the Chinese by paying them lesser for their imports from China. But the US citizen is the net sufferer, coz at the end of the day he fails to realize that his purchasing power is reduced and he has become poorer, due to the tussle between the 2 governments.


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