Currency Manipulation, Intervention– Big Deal with World Teetering on Currency War: Or, Red Herring In Trade Debate?

It’s big deal and it can start a global ‘currency war’: Currency manipulation, also known as; currency intervention, or foreign exchange market intervention…

According to some experts; the practice of currency manipulation is widespread among many countries and accounts for almost one-third of the world economy and more than two-thirds of global ‘current account’ surplus…

According to Economic Policy Institute; currency manipulation by China, other countries… and are costing many other countries millions of jobs and a continuing (non-adjusting) trade deficit… However, China is not the worst offender, e.g.; Singapore is worse than China, Taiwan is worse than China, Switzerland and Japan are arguably worse than China…

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The relative value of currencies is an important factor in determining whether a country’s trade will have a deficit or surplus… A trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds exports, and a trade surplus is a measure of a positive balance of trade in which a country’s exports exceeds imports… A trade deficit represents an outflow of domestic currency to foreign markets, whereas trade surplus represents an inflow of domestic currency from foreign markets… Trade deficits drains a country of jobs, factories, entire industries, national wealth, standard of living… whereas, trade surplus does the reverse, it increases jobs…

So what is currency manipulation? Currency manipulation occurs when countries sell their own currencies in the foreign exchange markets, usually against dollars, to keep their exchange rates weak and U.S. dollar strong. These countries thereby subsidize their exports and raise the price of their imports, sometimes as much as 30-40%. They strengthen their international competitive position, increase their trade surplus and generate domestic production and employment at the expense of other countries…

According to some experts; about 20 countries most notably China have engaged in such practices over the past decade at an annual rate that has averaged $1 trillion in recent years… It’s estimated the U.S. trade deficit has been several hundred billion dollars a year higher as a result and lost several millions of jobs over the decade… According to some experts; currency manipulation is by far the world’s most protectionist international economic policy in the 21st century, but neither the U.S. government nor the responsible international institutions; International Monetary Fund or World Trade Organization have mounted any effective response…

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According to Michael W. Klein; ‘currency manipulator’ is loaded with controversy… and, not so long ago, governments have decried U.S. monetary policy, e.g.;  according to Brazil’s Finance Minister; it’s U.S. monetary policy that contributes to weakening dollar and that can lead to ‘currency wars’… according to India’s Finance Minister; it’s U.S. ‘irresponsible monetary policy’…

According to Avinash Persaud; blame foreigners for domestic woe is the sad but unsurprising cardinal rule of politics, followed by even the most ardent internationalist. So U.S. blames other countries for its own  mismanagement of fiscal, monetary policy; hence China and other nations are convicted of manipulating their exchange rates, and Asia for saving too much… On the other hand, one could argue that U.S. monetary policy correctly focused on the domestic economy’s weakness, but that’s not necessarily how it’s seen in other countries…

Exchange rates swing around for various reasons, e.g.; it may be related to economic performance, anticipation of future events, even the whims of markets… Fluctuations are part of the international spill-over effects of economic policy in an interconnected world… Spill-overs do create both challenges and opportunities… as when recovering foreign markets draw in imports from the rest of the world… Hence, a narrow focus on a single bilateral exchange rate may serve some political interests, but for full economic analysis, it demands a more nuanced view…

In the article Lose-Lose or Win-Win? by Buttonwood writes: Currency volatility is on the rise… According to David Woo; for many countries facing zero interest rates and binding fiscal constraints, the only realistic policy tool left at their disposal to stimulate growth is a weaker exchange rate… Since all currencies cannot decline simultaneously, it might be tempting to think this is a zero-sum game: But it’s possible to argue that it’s actually win-win for overall global economy, e.g.; by depreciating currencies, central banks reduce real interest rates and thus lower real rates that stimulate demand and investment… But according to Mr. Woo; currency manipulations are lose-lose, e.g.; it stimulates higher currency volatility, which increases risk and cost of cross-border transactions…

Specifically, higher ‘foreign exchange’ volatility means it costs more for companies to hedge; and that may cause them to focus more on their home markets than on exports, leading to a slowing in the growth of global trade… Also it means that higher volatility will discourage foreign direct investment (i.e., building of factories…). This makes it more expensive for countries with a ‘current account’ deficit to finance themselves…

Hence, economic growth is more sluggish within a ‘currency war’ economic environment… Nevertheless, it’s probably true that a global environment in which countries feel that their neighbors are trying to steal a market by devaluating their currency is a world where co-operation is more difficult and one where barriers to global trade are more likely to be erected… Clearly, that is a lose-lose for all countries…

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In the article Currency Manipulation and Jobs Lost by Robert E. Scott writes: U.S. trade treaties and investment agreements have almost always resulted in growing U.S. trade deficits, job loss… This is important to keep in mind as negotiations for the Trans-Pacific Partnership (TPP) continue… and to understand that U. S. has a large and growing trade deficit with Japan and 10 other countries in the proposed TPP. This deficit has increased from $110.3 billion in 1997 to an estimated $261.7 billion in 2014.

In addition, according to some; several members of proposed TPP deal are well-known currency manipulators, including; Malaysia, Singapore, and Japan. In fact, Japan is the world’s second largest currency manipulator behind China and responsible for a substantial share of the bloated U.S. global trade deficit… According to some; by eliminating currency manipulation, it’s estimated that this would reduce the U.S. global trade deficit by between $200 billion and $500 billion each year, hence increase the overall U.S. GDP by between $288 billion and $720 billion and create between 2.3 million and 5.8 million U.S. jobs…

Virtually every major country is seeking depreciation, or at least non-appreciation of its currency to strengthen its economy, create jobs… According to some experts; at least 20 countries have been intervening in foreign exchange markets and building-up reserves of more than $10 trillion… According to C. Fred Bergsten; these countries thereby subsidize exports and raise the price of their imports, sometimes by as much as 30-40%…

Hence, they strengthen their international competitive positions, increase their trade surplus and generate domestic production and employment at expense of other countries… According to some; currency manipulation is the most distortive and protectionist monetary policy that has been deployed around the world in recent years. Hence it’s surprising and deeply disappointing that free-market enthusiasts defend the practice and reject practical remedies for countering it…

Currency manipulation or intervention bypasses the supposedly self-correcting natural supply/demand function of world currency markets… When currency exchanges work correctly and the exchange rate is set by the natural ebb and flow of markets, the world’s trade theoretically balances out… But if some countries seek to deliberately depreciate the value of their domestic currencies in order to stimulate their economy, and if other countries devalues their currency as well, then it’s no a win situation for all countries…

When devaluations becomes more aggressive and disorderly, it creates great systemic risks world-wide… Then, U.S. dollar borrowers will struggle to find liquidity and many corporations will see their export markets evaporate… Also, emerging markets would be forced to raise interest rates to prevent their currencies from collapsing… Although currency depreciation or devaluation is a common occurrence in the foreign exchange market; the hallmark of a ‘currency war’ is when several countries, all simultaneously, engaged in the devaluation of their currency at the same time…

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A ‘currency war’ is also known by the less threatening term ‘competitive devaluation’, but no matter the name; it’s an economic battle to greatly cheapen a country’s currency compared to that of others, which presumably will promote exports, jobs… However, the real lesson of ‘currency wars’ is that they don’t normally produce desired results, i.e.; increased exports, jobs, growth… What they produce is extreme deflation, inflation, recession, depression, economic catastrophe…

Currency wars are one of the most feared and important dynamics in the global financial system today: It’s not a term that is loosely bandied around by most monetary experts, but when 20 or more countries are either considering or have reduced interest rates or implemented other measures to ease their monetary policy: An important question must be asked: Is the world teetering on a currency war?