THE TALK OF A NEW 'CURRENCY WAR': A COMMENT

"Connally [U.S. Secretary of the Treasury] saw no reason to treat foreigners with any greater tenderness. He believed that in the final analysis countries yield only to pressure. He had no faith in consultations except from a position of superior strength....'There is little likelihood that the situation will work itself out without either revaluation of European currencies (which is the most probable course of action for the Europeans, given the present crisis); a devaluation of the dollar, or U.S. measures to restrict the imports of foreign goods to this country and encourage U.S. exports (which will take legislation). There will also probably be strong efforts on the part of the Europeans to restrict the amounts of the dollars held by their central banks and to apply other stringent measures against the dollar'....Nixon's unilateral decisions of August 15, 1971, had their desired effect. Allied cohesion had been strained but not broken. At this remove it is difficult for me to assess whether the brutal unilateralism coming so soon after the shock of the secret trip to Peking mortgaged relations unnecessarily for many years to come, or whether our allies by their immobilism left us no other option."

Henry A. Kissinger, White House Years, (1979), pp, 952,954 & 962.

"The unprecedented international imbalances of the first half of the 1980s have fundamentally altered the structure of the world economy. The United States, the creator of the postwar economic system and home of the world's key currency, has become the largest debtor nation ever known to mankind - and its red ink will continue to flow at least into the 1990s. Japan, widely viewed as a developing country only a generation ago, has become by far the largest creditor - and its massive buildup of foreign assets will continue expanding rapidly as far as one can predict. The actions taken to date to correct these imbalances have gone only about half the distance needed, so there is now no prospect for their early elimination-and very little for steps to cope with the structural transformation they will bring. The forces set in train by these historic changes will dominate the course of global economic events for the next five to ten years, and may go far to influence world politics as well."

C. Fred Bergsten, "Economic Imbalances and World Politics," Foreign Affairs, (Spring 1987), p.770.

"Currencies dominated this year’s annual meetings of the International Monetary Fund. More precisely, two currencies did: the dollar and the renminbi, the former because it was deemed too weak and the latter because it was deemed too inflexible. But, behind the squabbles, lies a huge challenge: how best to manage the global economic adjustment....

Above all, today’s low and falling inflation is potentially calamitous. At worst, the economy might succumb to debt-deflation. US yields and inflation are already following the path of Japan’s in the 1990s (see chart). The Fed wants to stop this trend. That is why another round of quantitative easing seems imminent.

In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will keep going until the US is satisfactorily reflated. What that effort does to the rest of the world is not its concern.

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from Naturally, one could imagine an opposite course. Indeed, China objects to the huge US fiscal deficits and unconventional monetary policies. China is also determined to keep inflation down at home and limit the appreciation of its currency. The implication of this policy is clear: adjustments in real exchange rates should occur via falling US domestic prices. China wants to impose a deflationary adjustment on the US, just as Germany is doing to Greece. This is not going to happen. Nor would it be in China’s interest if it did. As a creditor, it would enjoy an increase in the real value of its claims on the US. But US deflation would threaten a world slump".

Martin Wolf, "Why America is going to win the currency battle," 12 October 2010, in www.ft.com.

Another 'currency war' is upon us. As the quotations from Dr. Henry Kissinger the former American Secretary of State and National Security Adviser & his one-time aide Fred Bergsten shows, this has been an ongoing problem for upwards of forty years now (more in fact: the first tremors of this problem go back to the last years of the Eisenhower Administration). Similarly the related issue of economic imbalances are almost as old. The fact of course that these problems have been ongoing for so many years, seems to indicate that per se, the problems (such as they are) are not drastic or requiring immediate and thoroughgoing remedies. Peut-etre. On the other hand, as the always wise, Martin Wolf of the Financial Times, points out for us, with the current, unprecedented economic turbulence flowing out of the Financial Crisis of 2008-2009, things have reached an impass which cannot be sustained. As per Martin Wolf, the USA and other debtor countries (UK in particular), as well as those countries anxious to not have their currencies inflated unduly by Chinese economic policies), have the whip hand in this affair. The only question of course is if the USA et al., has the courage to use its power. As per Henry Kissinger's Memoirs dealing with the 'Nixon Shocks' of 1971, it is only via a policy which is crafted unilaterally and with little by way of consultations and endless negotiations, that a forward looking policy can be implemented. In the case of Nixon's 15 August 1971 policy, as the American economic historian and analyst, David Calleo, pointed out many years ago: "In the short run, Nixon's revolution of August 15, 1971 was a stunning success (David Calleo, The Imperious Economy, 1982, p. 105 & passim)." The issue in the current circumstances is if the American Administration has the will and the stamina to impose a solution upon the PRC. If not, then that is a sure sign that absolutely nothing will be done, and in the worlds of Furst von Bismarck, we will see merely a 'papering over of the cracks'. Or in the words of the poet: nihil ex nihilo.