Currency “War”? Editor: The US has been engaged in a currency war since late 2009, however it wasn’t until late last year that Fed Chairman Ben Bernanke admitted it publically. In a seminar in Tokyo on 14 October he let it be known that it is the central bank’s intention to lower the exchange value of the dollar. The ultra-loose monetary policy being pursued by the Fed has forced those trying to maintain a currency peg to the US dollar to print money of their own. As a result the US is essentially exporting its inflation to countries around the world, including China, Hong Kong and Saudi Arabia. Bernanke’s speech contained a veiled threat which stated that those countries who maintain a currency peg to the US dollar must let their currencies appreciate, otherwise the Fed would continue to print money causing them to experience even more inflation. As Jim Rickards, author of the book Currency Wars, points out, Bernanke actually wants these countries to let their currencies appreciate so that the inflation comes back to the US, therefore helping to reduce the value of the national debt. As a result we can expect more money printing from the Fed in the months and years ahead. If these currency wars do result in a currency crisis, Rickards believes that it’s much more likely to occur in the UK versus the US, since the US still has the world’s largest holding of gold with which to back the dollar should it run into trouble. By contrast, the UK ranks number 18 in the world in terms of gold reserves, behind the likes of Venezuela, Portugal and Iran.

The word ‘war’ seems sensationalist at the current stage of competitive devaluation between developed nations.

Recall that the most recent significant currency war began after the 1929 Wall Street Crash, when France lost faith in British Sterling as a source of value and begun selling it heavily on the markets. France and the US began building hoards of gold, which inevitably contributed to the Sterling crises of 1931; whereby Britain took the pound off the gold standard.

A “beggar thy neighbor” policy became entrenched as nations competed to export unemployment, via currency devaluation. The fluctuations in exchange rates were harmful for international traders. Global trade declined sharply as a result and was also disrupted by retaliatory tariffs.

The rolling currency devaluations only ceased when France, Britain and U.S. created the Tripartite Agreement, which was informal and provisional, but nonetheless successfully stabilized exchange rates. World trade did not recover until much later.

There are two obvious differences today. First, it is hard to argue that there is a mainstream loss of faith in the current major currencies. Despite widespread use of unorthodox monetary policy tools, the U.S. dollar continues to act as a counter-cyclical currency and dollar weakness remains orderly. Meanwhile, the euro remains well within its historic trading range, despite the sovereign debt crisis of the past two years.

Second, the near total absence of protectionist measures to date, suggest that any deviations in trade volumes relate to final demand rather than trade policy.

The G20 finance ministers’ meeting later this week will no doubt keep the spotlight on ‘currency wars’. But until there is evidence that protectionism is restraining trade, it seems that a currency war between developed countries is an overstated risk.

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