Cooperation can happen only between equals. Between unequals, it's either bully or plea behind the facade of cooperation. This was evident during the Bretton Woods agreement; during the German unification; and today, in the G20 appeal for cooperation against currency war. As all economies suffer in racing their currency values to the bottom and attempts for cooperation fail, the new economic growth model may be inward-looking rather than outward-looking. This article focuses on how it is difficult for countries to cooperate for others' benefit while themselves mitigating crises; and how economies should avoid aggressive export-pushing and try becoming self-sufficient, the theory of comparative advantage notwithstanding.
In Bretton Woods agreement (1944) the US pledged to redeem $35 for one ounce of gold; ran expansionary monetary policy, inflation leading to overvaluation of the dollar. When the US, the world’s biggest economy, asked various central banks to cooperate by buying and keeping dollar reserves, it was more bullying, which got further endorsed by the rude refusal by President Nixon in 1971 to honour the promised dollar rate. Today, when the US seeks cooperation from China and others to maintain their trillions of dollars’ forex reserves in US T-bills, it’s more of a plea to finance its mammoth double deficit. Tomorrow, if double-dip becomes a reality, will America overcome it again by creating a war somewhere? Hope not.
After German unification (1990), West Germany got overheated while reconstructing East Germany and raised interest rates to rein in inflation. But since their trading partners were facing recession, yet also had to defend their currencies fixed against the Deutschmark, they pleaded the Bundesbank not to tighten. When the strongest eurozone economy, Germany, sought cooperation from European countries, it really was ‘bullying’. Today, during the European debt crisis and Germany itself probably needing a bailout later, Berlin’s call for cooperation by a stringent measure to reduce deficits is a plea, lest the euro should fall apart.
The Bank of Japan has started (2010) suppressing the yen to aid exports and adapted the popular managed float. America and other advanced nations that did not earlier intervene, are also devaluing their currencies to keep jobs from going to the emerging economies via BPOs and for export advantage. China, India and other emerging economies anyway have undervalued currencies vis-à-vis their PPP levels. Thus, if all countries race their currency values to the bottom, it will be a zero-sum game with no winners. In the process, inflation would climb higher while sterilisation will load net loss on every dollar of forex reserves held in US bonds. SDRs could then probably replace the dollar as global reserve currency.
To arrest this currency war , G20 countries are seeking global cooperation. The question is, why would countries themselves facing crisis cooperate for betterment of others? For instance, why should China keep holding US T-bills and finance the US deficit? Why should Japan let the yen appreciate while letting its exporters suffer? Why should India let rupee appreciate and lose huge employment in its IT sector? Why should the European Central Bank bail out its debt-ridden countries while exhausting all its resources and letting euro fall apart? For that matter, how long and why should the US keep its dollar on free float and overvalued when its own unemployment rate is close to 10%? All the answers, ironically, seem to support the logic of a currency war.
In Bretton Woods agreement (1944) the US pledged to redeem $35 for one ounce of gold; ran expansionary monetary policy, inflation leading to overvaluation of the dollar. When the US, the world’s biggest economy, asked various central banks to cooperate by buying and keeping dollar reserves, it was more bullying, which got further endorsed by the rude refusal by President Nixon in 1971 to honour the promised dollar rate. Today, when the US seeks cooperation from China and others to maintain their trillions of dollars’ forex reserves in US T-bills, it’s more of a plea to finance its mammoth double deficit. Tomorrow, if double-dip becomes a reality, will America overcome it again by creating a war somewhere? Hope not.
After German unification (1990), West Germany got overheated while reconstructing East Germany and raised interest rates to rein in inflation. But since their trading partners were facing recession, yet also had to defend their currencies fixed against the Deutschmark, they pleaded the Bundesbank not to tighten. When the strongest eurozone economy, Germany, sought cooperation from European countries, it really was ‘bullying’. Today, during the European debt crisis and Germany itself probably needing a bailout later, Berlin’s call for cooperation by a stringent measure to reduce deficits is a plea, lest the euro should fall apart.
The Bank of Japan has started (2010) suppressing the yen to aid exports and adapted the popular managed float. America and other advanced nations that did not earlier intervene, are also devaluing their currencies to keep jobs from going to the emerging economies via BPOs and for export advantage. China, India and other emerging economies anyway have undervalued currencies vis-à-vis their PPP levels. Thus, if all countries race their currency values to the bottom, it will be a zero-sum game with no winners. In the process, inflation would climb higher while sterilisation will load net loss on every dollar of forex reserves held in US bonds. SDRs could then probably replace the dollar as global reserve currency.
To arrest this currency war , G20 countries are seeking global cooperation. The question is, why would countries themselves facing crisis cooperate for betterment of others? For instance, why should China keep holding US T-bills and finance the US deficit? Why should Japan let the yen appreciate while letting its exporters suffer? Why should India let rupee appreciate and lose huge employment in its IT sector? Why should the European Central Bank bail out its debt-ridden countries while exhausting all its resources and letting euro fall apart? For that matter, how long and why should the US keep its dollar on free float and overvalued when its own unemployment rate is close to 10%? All the answers, ironically, seem to support the logic of a currency war.
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