Currency wars cast a shadow on global trade

A Q&A with financier and author James Rickards

Economist Intelligence Unit

March 12, 2013

By Robert Stowe England


Talk of currency wars is back in the news again. This is due in part to the recent move by Japanese Prime Minister Shinzo Abe to nominate as head of the Bank of Japan a governor, Haruhiko Kuroda, who promises to do “whatever is needed” to combat Japan’s long bout with deflation, a move likely to devalue the yen against other currencies.


To shed light on the impact of this action and other efforts at monetary easing by central banks in developed countries, especially the Federal Reserve in the U.S., we turn to economist and financier James Rickards, author of the 2011 book, Currency Wars: The Making of the Next Global Crisis.


Q: You predicted a global currency war in your book in 2011. Do you believe a currency war is underway?


A: Yes. And that’s a good question [to ask now] because of the recent actions of the Bank of Japan, [and Prime Minister] Abe, and we’re all familiar with that story. [That move in Japan and other monetary easing moves by central banks have] a lot of people are saying, ‘Hey, there’s a currency war going on.’ And I say there sure is and it started in 2010. And it was started by the United States. What we’re seeing is a later or advanced stage of the currency war.


My analog there is that in a real war it’s not all fighting all the time. You have quiet periods and then you have terrible battles. We’ve just come through a quiet period and now this might be the Battle of the Bulge with Japan getting involved in a big way. But, the war itself began years ago.


And it’s very much to be expected. We are not always in a currency war but when we are, they last for a very long period of time. What I call Currency War I lasted for 15 years, from 1921 to 1936. Currency War II lasted for 20 years from 1967 to 1987. This third currency war began in 2010, but given the dynamics of it, not only the history, one should expect it to go on for 5 or 10 or 15 years.


Q: Why do currency wars last so long?


A: The reason that happens is there’s no logical resolution. It’s like a ping pong match between two pretty well-matched opponents. It just goes back and forth and back and forth.


Q: What started the currency war in 2010? Was it the Federal Reserve’s August announcement it would launch a new round of quantitative easing, QE-II – a move that sent the dollar lower against currencies around the globe?


A: Quantitative easing is definitely a tactic to fight the currency wars. But the ‘declaration of war’ came in President Obama's January 2010 State of the Union Address when he announced the National Export Initiative and said it was the policy of the United States to double exports in five years. There is no way to double exports in five years without cheapening the currency and unilaterally changing the terms of trade in favor of the United States. So, the currency wars were implicit in the president's announcement.


This 2010 policy change was itself the fruit of the September 2009 G-20 summit in Pittsburgh when the United States pushed for a global ‘rebalancing’ in favor of more Chinese consumption and more U.S. exports. QE-II came later in 2010 as a policy designed to fight the currency wars, i.e. cheapen the U.S. dollar. By September 2010 the results began to emerge and this is when [finance minister] Guido Mantega of Brazil declared the ‘currency wars’ to be underway. He was right.


Q: And that brings us to the ‘victims’ of the currency devaluations that come from monetary easing: the countries that are seeing their currencies rise, including several countries in Latin America.


A: Right. And like any war, there’s collateral damage. [Federal Reserve Chairman Ben] Bernanke’s policies, speeches and proclamations are very much aimed at the G-7. And [the Fed] would love for Europe to join. But, Europe has not joined in. Europe is doing the right thing. They’re the only major economic bloc that is pursuing the correct policies. But, Bernanke would like them to [join in in a common policy.]


China, the U.S., Japan, and the U.K., are the main protagonists in this. But what about everyone else – Australia, Canada and Latin America? [Those officials supporting monetary easing tell the nations with rising currencies,] ‘You are your own engine of growth. You’ve got unutilized factors, whether it is unemployment or direct foreign investment that contributes capital, etc. So, you’re the guys that need to suck it up. You need to let your currencies go up and attract foreign investment, if you can. Yeah, it’s going to hurt your exports a little bit. But, that’s the price you’ll have to pay so we can grow,’ meaning so the G-7 can grow. ‘If we don’t grow, you’re going to be in so much worse shape than you are now. That’s the price you have to pay. That’s your contribution to the overall formula for a rebalance, so-called, for the global economic growth.’


Now, [that argument is] completely self-serving. And it’s getting a mixed response [in terms of reactions from countries with rising currencies]. Chile I would put on my list of countries that are doing the right things, along with Germany, Singapore, Canada and Australia, to some extent, and some others. Brazil is doing absolutely the wrong thing. Brazil makes me cry. The spent 50 years getting inflation under control. And now in a matter of just two years, they’ve just thrown it out the window, saying, ‘We’ll take the inflation please. We don’t want our currency to go up or be maintained.’ Brazil hasn’t gone so far as to lapse into trade wars, but they’re getting close. They’ve really used a whole basket of tricks and tools to cheapen their currency.


Q: Where are they currency wars taking us?


A: What history teaches us about currency wars is that it never works. But, it’s irresistible because superficially it looks like it will work. They say, ‘Cheapen the currency. Help GDP with net exports and create jobs. Isn’t that a good thing?’ The answer is ‘maybe’ if you could do it a vacuum for a short period of time. You might get a little pop. But, in the real world what you get is retaliation and inflation.


And what the Fed is saying to Brazil and Peru and everyone else, for that matter, from South Korea to Taiwan, Indonesia, Thailand and the rest of the world, is, ‘Our printing press is bigger than yours. And, if you want to fight the currency wars, bring it on. We’ll just print more. And you’re the guys that are going to get inflation and no real growth until you cry uncle, until we break you.’ That’s what the Fed did to China. The Fed did break the People’s Bank of China and they can certainly break the central bank of Brazil.


Q: If you are a North American exporting company, how will the currency wars affect you? And, what is the outlook for small and medium-sized exporters in the United States and Canada?


A: My advice is to focus on good products and move up the innovation chain. Manage your costs. Look at Japan. In 1971 President Nixon took the U.S. off the gold standard for the explicit purpose of cheapening the currency relative to trading partners to promote exports and create jobs. It was explicitly stated at the time. But, what happened? The yen went up 17% against the dollar in a matter of months and then got a lot stronger from there. And Japan continued to be an export powerhouse. The strong yen did not slow down the Japanese exporters very much. They just got a lot smarter, worked harder, cut their costs, and innovated. And that would be my advice – whether it’s U.S. companies or Peruvian companies competing in the world market. My four-word summary of currency wars is ‘all advantages are temporary.’ Whatever advantage you think you’ll get is temporary. It will vanish soon and you’ll be left with inflation.





Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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