Over the weekend,

the political parasi…, err, 'leaders of the world economy', got together for a pow-wow over what some have referred to as 'a looming currency war' – which is the stage preceding 'trade war'. In turn, following the thought of Bastiat ('when goods don't cross borders, armies will') , trade war is often the stage preceding actual war.


You'd think it was a serious subject, and indeed it is. Naturally, no modern-day nation state wants to give up its 'legal tender' fiat currency backed by nothing and the associated banking cartel with its fractionally reserved lending privileges. The modern welfare/warfare states could not exist without these features. Also, mercantilism is still widely practiced these days, and trade is not free, but managed. A free trade agreement consists of a single sentence: 'Henceforth, all trade between our nations shall be entirely uninhibited'. Managed trade requires documents thousands of pages long.

Since most of these fiat currencies are free-floating against each other, a deliberate policy of weakening one's currency is invariably noticed with some alarm by those whose currencies strengthen as a result. Then there are places like China that use a non-convertible currency and have a closed capital account, which in the particular circumstance of the US weakening the US dollar to which China has more or less pegged the yuan, means that everybody feels they are losing out to China in the beggar-thy-neighbor games. China in turn has a growing domestic inflation and bubble-blowing dilemma as a direct result of its currency policy.

Well, we are all aware of the problem of course, and so it was decided to hold aforementioned pow-wow – a luxurious get-together on the tax payer's dime, that usually achieves precisely nothing. In the case of most 'G 20' meetings this is actually the outcome people should hope for, since what is discussed are as a rule various assaults on the citizenry's wallets (lately transaction taxes, 'climate change' legislation, and so forth).

Anyway, the 'currency war' debate went as such debates usually go – namely nowhere. As Bloomberg reports, 'Global Finance Chiefs Fail to Resolve Currency Spat'.


“Exchange rates dominated the IMF’s annual meeting as Treasury Secretary Timothy F. Geithner, People’s Bank of China Governor Zhou Xiaochuan and their counterparts split over whose policies are the biggest threat to the world economy on concern countries are relying on cheap currencies to aid growth. China was accused of undervaluing the yuan, while low U.S. interest rates were blamed by emerging markets for flooding them with capital. Brazil took aim at both the U.S. and China.”


Amidst the sniping, it was mentioned that 'capital controls' are becoming respectable once again. We have written about the utter futility of capital controls in the past in 'Government Actions in Times of Emergency' (scroll down to the paragraph about capital controls). Nonetheless, the policy is seeing a revival. As the Telegraph reports: 'Capital controls eyed as global currency wars escalate'. The funny thing is that this time, the countries concerned do not want to keep capital from fleeing their shores – they want to keep it from arriving in the first place. If that strikes you as perverse, that is because it is perverse. Given the flood of cheap money from central banks, savers are forced to speculate and take unnecessary risks if they want to preserve the purchasing power of their savings. Hence the vast inflows of capital into emerging markets, where inflation-beating returns are thought to be most likely to be had.

From the Telegraph article:


“Peter Attard Montalto from Nomura said quantitative easing by the US Federal Reserve and other central banks is incubating serious conflict. "It is forcing money into emerging market bond funds, and to a lesser extent equity funds. There has truly been a wall of money entering many countries," he said. "I worry that we are on the cusp of a competitive race to the bottom as country after country feels they need to keep up."

Brazil's finance minister Guido Mantega has complained repeatedly over the past month that his country is facing a "currency war" as funds flood the local bond market to take advantage of yields of 11pc, vastly higher than anything on offer in the West. "We're in the midst of an international currency war. This threatens us because it takes away our competitiveness. Advanced countries are seeking to devalue their currencies," he said, pointing the finger at America, Europe and Japan. He is mulling moves to tax short-term debt investments.  Goldman Sachs said net inflows have been running at annual rate of $520bn (£329bn) in Asia over the last 15 months, and $74bn in Latin America. Intervention to stop it creates all kinds of problems so the next step may be "direct capital controls", the bank warned.”


Enter the 'Currency Cop'

So, given all these mounting concerns over protectionism, capital controls and trade wars, what do the 'leaders of the world economy' decide after stuffing themselves with lobster caviar and champagne and posing for photographs?

As Bloomberg tells us:


Finance ministers and central bankers pledged to improve cooperation, yet did little to show how they would alter their ways beyond agreeing to let the IMF study the matter. With the dollar down 11 percent against the yen since mid-June, compared with less than 3 percent versus the Chinese yuan, the focus turns to Group of 20 talks in South Korea in coming weeks to prove international policymaking isn’t in tatters.  “Policy makers seemed to be trying to diminish concerns about currency wars,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “There did not seem any commitment to change behavior, however. There is little to suggest that the dollar’s direction is anything but down.”


The IMF will 'study the matter'! What a relief!

The Bloomberg article goes even further, when it later asserts:


“Unable to find common ground themselves, governments agreed the IMF should serve as currency cop by preparing reports to show how the policies of one economy affect others. The studies will focus on the U.S., China, the U.K. and the euro area.  “The need to have this kind of spillover report has been discussed for months and now it’s part of our toolbox,” IMF Managing Director Dominique Strauss-Kahn said. “


A new Currency Cop is in town! Preparing reports! You couldn't make this up, but there it is. Now that this 'kind of spillover report is part of the IMF's toolbox' we can all rest easy in the knowledge that a new justification for the existence of this bloated and costly bureaucracy exists. After all, who would otherwise write those reports? We'd be without a currency cop!



“The IMF nevertheless has little record of success on pushing global authorities to change their ways. A 2006 effort to oversee the rebalancing of the world economy petered out, and China has repeatedly rejected the fund’s analysis.

“The major economies are each encouraging the IMF to push harder on other countries, but showing no willingness to yield to the IMF any such leverage over their own policies,” said Eswar Prasad, a senior fellow at the Brookings Institution and a former IMF official.”


It seems to follow from this that currency coppery is pretty much a useless exercise. However, as the Washington Post remarks: 'Global finance chiefs deliver tough talk on currency, China', in reference to a speech given in advance of the meeting by Robert Zoellick, who these days is president of the World Bank (he sure gets around) – yet another giant bureaucratic organization whose existence is somewhat questionable. Well, at least we get some 'tough talk' from it.

So this is the current state of affairs in the blossoming currency war and protectionism situation. A situation that suspiciously reminds one of the events during the secular contraction of the 1930's, when world trade collapsed amidst a similar deterioration in international trade relations.

We now have 'tough talk' and a 'currency cop' writing 'spillover reports'. What could possibly go wrong?



IMF chief Dominique Strauss-Kahn, flanked by other well-fed bureaucrats, the new 'currency cop'.

(Photo credit: AP)



Pieces of government-issued 'legal tender'. A perfectly useful resource – paper – made worthless by governments slapping some ink on it.

(Photo credit: unknown author)




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