The currency war between China and the US will be inevitable if the US Federal Reserve continues with its current policies, especially in light of the high rates of unemployment and lack of economic improvement. This would result in the Federal Reserve producing more currency in order to buy governmental bonds to end the recessions, encouraging banks to provide loans, and companies to make investment, which would result in more people gaining employment.
This is the crux of the matter. This is an issue that has motivated Central Bank heads to comment, and dominates the front cover of this week’s “Economist” magazine. This issue was also tackled by Martin Wolf, the chief economics commentator at top international business newspaper “The Financial Times.” The international Currency War has broken out in the most ferocious and relentless manner. On 27 September Brazilian Minister of Finance Guido Mantega announced the outbreak of the “international currency war.” This war will revolves around three main axes: firstly, not allowing China’s currency genuine freedom, thereby preventing it from gaining market value against other currencies. The second axis is the economic policies of rich countries, or more precisely, their intention to print more currency in order to buy governmental bonds. The third axis is how emerging markets behave towards this capital flow, for rather than these countries allowing exchange rates to rise, the governments of many such countries have stepped in to purchase huge amounts of foreign currency, or imposed tax on foreign imports.
Brazil recently doubled taxes on imported goods, whilst Thailand put in place a tax of 15 percent on foreign investors who purchase Thai bonds. Whilst South Korea is preparing to announce a number of financial policies in response to what is happening on the international arena. South Korea is specifically concerned about the fierce battle that is taking place over the issue of currencies, because Seoul is set to host the forthcoming G20 Summit in November.
The expected effects of this war have become clear and predictable, this includes; most importantly, the value of assets increasing in the long-term, more capital moving towards countries that do not have financial expansionist intentions and relatively conservative [financial] policies like Switzerland or countries with much better yield like the emerging markets. Studies estimate that the volume of capital in emerging markets between 2010 and 2011 will exceed 800 billion dollars. However, Western stock markets are extremely alarmed by the fact that China’s monetary reserve reached 2.6 trillion dollars at the close of September 2010. China’s reserve is expected to climb to 3 trillion dollars by the end of 2011. Meanwhile, the overall monetary reserve of the emerging markets is expected to hit 6.8 trillion dollars by the end of the same period (which represents a 50 percent increase to the same figure prior to the most global financial crisis). This is the situation today, and this explains the devaluation of the dollar, something that is forecast to continue. Therefore there is no use denying the existence of an international currency war. Such denials fail to conceal the adverse impact this is having, and will certainly prevent the issuance of the required policies, legislation, and solutions.
The world is keenly observing the developing of this currency war, its effects on global trade, and its connection with inflation in the prices of goods and services. This currency war is truly a serious economic issue!