The world careers towards a new global financial crisis, newspapers, politicians and just about everyone is looking for someone to blame. Aside from the bankers, who have been the mainstay of the blame game (and rightly so), attention is being shifted to how governments are manipulating their currencies.
Certainly the US knows who is to blame. It is the Chinese, whom the US accuses of artificially manipulating the Yuan downwards. To intimidate and possibly punish China, the Senate passed a bill to penalize any country that manipulates its exchange rate. No names are mentioned, but China is clearly in the cross-hairs.
Why all the fuss about undervalued currencies? The reason is that a government, by artificially reducing the value of its currency, help domestic firms compete by making the goods they export cheaper and making imports more expensive. In the case of imports, currency manipulation acts as a hidden tariff, unfairly placing overseas competitors at a disadvantage.
But is China the only country that is unfairly manipulating its currency or should that finger be pointed at others?
A less obvious candidate is Germany, which has been happy to play the innocent victim in the whole euro crisis. But is Germany really blameless? To answer this question we need to understand why Germany was so keen on creating the Eurozone that not only included strong economies but also weak ones – Greece, Italy, Portugal and Spain – the very countries that have brought on the current crisis. By including the weaker economies in the Eurozone, Germany was able to adopt a new currency that was worth much less that the Deutschemark, whose value reflected an economy that was the strongest in Europe. Thus, the euro allowed Germany an effective devaluation of around 40%. Thus, Germany has done very nicely in the last ten years out of out of having countries like Greece within the Eurozone – and so has France, for the same reasons.
On the other hand, Greece has done quite poorly, having its currency artificially valued upwards. So, the unforgiving attitude the Germans have towards Greece needs a reality check. Nevertheless, Greek politicians have certainly run its economy into the ground, and reform is urgently required. But in pursuing reform, perhaps the Germans should take a slightly less moralistic tone and accept that the blame should be shared around.
Who else should be blamed? Well, in stimulating their economies, both the UK and Japan have had their printing presses working overtime, driving down the value of the pound and yen, respectively. Similarly, the Swiss franc has been artificially reduced by pegging it to the euro.
The final culprit that has been enthusiastically participating in the currency war is the US itself. No innocent, it, too, has been printing dollars to stimulate its domestic economy, effectively driving down the value of its currency. In that regard, the US is no different than China, and, it could be argued, possibly an even worse manipulator of currency.
In his book Currency Wars, investment banker Jim Rickards looks at both the history of previous episodes of currency manipulations and prospects for the future. His book is well worth the read, particularly if you are worried that we are on the cusp of another global financial crisis.