“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” he [Brazilian finance minister Guido Mantega] said.
The world is in the midst of an “international currency war” according to Brazil’s finance minister as governments force down the value of their currencies to boost their struggling economies.
The comments are the first public admission made by a senior policymaker about a practice which has become increasingly widespread since the global economic downturn.
Many countries, notably China, have been deliberately weakening their currencies by selling them on foreign exchanges or keeping interest rates artificially low to make their exports cheaper.
The currency issue is nothing more than a scapegoat for the failed domestic policies. US has trading deficit with almost every trading partner, regardless their currency. The deficit is structural. Indeed, the saving rate in US is too low, while the big part of economy that only actually makes stuff is the military industrial complex for blowing others up, and not many consumer goods are sold overseas.
A higher yuan will actually increase trade the deficit with China until it is high enough for manufacturers to move out of China. Until then buyers just have to pay higher price. During 2006 to 2008 yuan appreciated by nearly 20% and that caused US deficit to increase by 30%.
Capital chases maximum profit. No matter how high yuan goes, no manufacturers will come back to north America. At most they will go to other cheaper places like Vietnam and India. They only come back if they can make better profit here. That may happen if oil goes to $300 and causes shipping cost to sky rocket, or if the US enforces strict trade controls as has happened in the past like during the World Wars of the 20th centuries.
Myth #1: The US will continue as long as it obtains more loans
The point is not invalid – the U.S. needs legitimate purchasers of its debt to give the dollar any further credibility – the Fed buying its own debt is no different than a Ponzi scheme and will destroy the dollar in slow motion. The world has been telling the U.S. }enough,” and that is why the Fed has to buy increasing amounts of its own debt.
It is basically extortion – the US dollar still rules the roost, and none of the other central banks would be foolish enough to dump (as much as they might want to), because the consequences would be catastrophic. So you get a slow unwinding. The unwinding will accelerate if things flare up with China, however, and everyone would suffer if these idiotic politicians get their way.
That said, we should see that mostly just pre-election saber-rattling to garner votes – the sheeple love the idea of “buy American” even though the country’s manufacturing core is an empty shell and will never re-establish. Sad, really.
A return to gold standard to ease currency wars?
In decrying the gold standard pundits often write things like: “The problem is not the value of our currency but the extent of our debt, national and personal, and the public persona of our politicians that allows it.”
Under a gold standard dangerous amounts of debt, such as those carried by Canada and most of all the United States would not only not be allowed, it would not be possible.
Gold standard does not mean there would be no printing of paper money, but rather that every piece of paper money printed would be backed by something relatively scarce and which holds value (gold, obviously). Therefore, there would be a finite amount of paper that could be printed in the first place, greatly limiting the amount that could be borrowed.
Fiat currency, like that of most nations in the world, are just asking to be devalued through the carrying of debt. It is easy for politicians to borrow with money that isn’t “real” money. We need a gold standard so that politicians cannot have the power to bankrupt our children’s futures to finance our immediate, short term, greedy needs (i.e. cheap Chinese crap from Wal Mart, unnecessary SUVs, unions that make obscene demands, etc.) and wasteful and illegal wars (Afghanistan, Iraq).
Without a gold standard (which we’ll probably never see again) you can own a piece of “global currency” by buying physical gold. That’s the only currency that can never be “talked down”, and will always rise against currencies that are.