Feb 28, 2013
First Ms. Lagarde and now Mr. Bernanke (in the recent testimony on Capitol Hill) assure us that there is no currency war happening. Well, that’s true on the face of it.
However, why do currency wars begin? Because they work. Initially. Unless you’re willing to say the following that the populace of an advanced economy is going to sit back and watch their exports and by implication their jobs affected. But you might say – China has been manipulating their currency for at least a decade.
However, I think the issue with China is that it serves primarily as a low cost manufacturer by default for most of the advanced economies. While each developed economy didn’t particularly like the idea of currency manipulation by China, it affected each equally, more or less. This is quite different when each developed economy is trying to jumpstart their economies and boost exports by devaluing their currencies. The first few actors will benefit from this practice and the longer that these activities persist, the effects die down.
But please be under no illusions – these are desperate measures that have pricing volatility effects on every supply chain.