Many thanks to A2 student Emersen Tamura-Paki for this paper on Currency Wars by Fred Bergsten which was delivered in May this year. Although it is a long document it is very readable and contains some interesting points.
* Virtually every major country is looking to keep its currency weak in order to strengthen its eocnomy and save/create jobs.
* Over 20 countries have been intervening in foreign exchange markets to suppress their currency value which has led to the build-up of reserves totaling over US$10 trillion.
* It has been led by China but includes a numer of Asian as well as several oil exporters and European countries. They account for two-thirds of global current account surpluses.
Global surpluses of currency manipulators have increased by $700-900 billion per year – see Figure 1.
* The largest loser is the USA – current account deficits have been $200bn – $500bn per year as a result. Estimate that 1 – 5 million jobs have been lost under the present conditions and likely to continue.
* Japan this year talked down its exchange rate by about 30% against the US$.
* France has called for a weaker euro – which seems the only feasible excape from many more years of stagnation. This favours, in particular, the German economy with its export growth.
However some countries have been justified in their intervention. Some countries currencies have become overvalued and produced external deficits due to widespread manipulation. Brazil and New Zealand are countries which have been justified in their intervention. Our neighbours Australia have also expressed concerns as the appreciation of the AUS$ has been the result of the significant demand for minerals from China. This does leave other exporters struggling to maintain competitiveness especially if their goods/services are elastic in nature.
The systemic problem arrises when there is continued intervention and undervaluation of currencies. Fred Bergsten illustrates the application of these principles in grid where the orange coloured cell constitutes the objectionable behaviour.
According to Bergsten the practice is widespread and the flaw in the entire international financial architecture is its the failure to effectively sanction surplus countries, especially to counter and deter competitive currency policies.