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Money-printing OK for US but taboo for others
Source: Xinhua |
October 20, 2010, Wednesday
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Print Edition
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AS the US dollar continues to depreciate, many other economies are being forced to intervene in the foreign exchange markets to devalue their own currencies.
The world's main economies are trapped in a likely "currency war," which might hamper the recovery of the world economy.
Traditionally, a currency war refers to the situation in which one nation, relying on its strong economic power, buffets its competitors and seizes other nations' wealth through monetary and foreign exchange policies. However, there is no obvious evidence that many countries are conducting a "currency war" in this sense.
Actually the meaning of the so-called "currency war" right now is much more simple and specific: some nations, which are facing internal economic difficulties, devalue their currency to simulate exports and create more jobs.
If more and more nations adopt this kind of foreign exchange policy, the interest conflicts between them will get worse, damaging the recovery of the global economy.
Far from a war
The current situation is far from a war, although there is more conflict between nations' monetary policies. The Western media's hyping of a "currency war" has exaggerated divisions on currency policies and brought more tension to the international community.
It appears the cause of a likely "currency war" is the upgrading of conflicts on the yuan exchange rate between the United States and China.
Some other main economies also took action in this "war." The Japanese government launched a fusillade of intervention to hold down the yen in foreign exchange markets. Brazil, South Korea and Singapore used guerrilla tactics of doubling taxes on capital inflows to stop their currencies surging.
Yet the real cause of the likely "currency war" rests with the United States.
First, the United States is facing a sluggish economic recovery and high unemployment, and the economy has been a major issue of the November 2 midterm elections. Many US politicians have the impulse to use the yuan exchange rate issue as a scapegoat for the weakness of US economy. They highlighted the question of the yuan's exchange rate and intensified the dispute, making the yuan seem like the eye of the storm.
Second, the root cause is the Federal Reserve's massive printing of money in response to the financial crisis. The Fed adopted expansionary fiscal and monetary policies and infused massive liquidity into the market, which caused depreciation of its currency.
The result is that other related countries, such as South Korea, Brazil and Singapore, will face pressure to appreciate their own currencies versus the US dollar, posing challenges to their export and financial security.
These countries are forced to intervene in foreign exchange markets to hold down their currencies, thus forming a latent "currency war."
What should be noted is that the US has adopted a "double standard": in the eyes of some US politicians, it is reasonable for the Fed to "print money" to devalue the dollar but illegal for other countries to hold down their currencies to maintain their economic and financial security.
If the Fed continues to "print money" in the world's largest economy, it will lead to excess liquidity, depreciation of the dollar, and finally serious speculation of hot money.
The typical result is like this: if governments do not intervene in the market, a massive influx of dollars as hot money will generate new bubbles in stock and real estate markets of emerging and developing economies. And if the governments mop up the hot money by "printing money," inflation is likely.
Depreciation of the dollar may also cause commodity prices to surge. Situations like soaring oil prices and food crises will return. More important, if all nations adopt the foreign exchange policy of "beggar thy neighbor," the global economy will face a severe challenge.
During the 1930s economic crisis, many major economies abandoned the gold standard and devaluated their currencies, which led to protectionism and further harmed the economic recovery. It is a painful lesson.
Real cause
The real cause of the "currency war" is the US politicians' electioneering and money printing by the Fed. Still, some American politicians and a few Western media not only distort the truth, but also press China to take the responsibility or even discredit China.
Some people even proposed that as a "responsible stake holder," China should accelerate the appreciation of yuan to avoid the outbreak of a "currency war."
As an old Chinese saying goes, he who ties unties. The yuan exchange rate is not the main cause.
Even a large appreciation of the yuan will not solve the problem. Other emerging and developing economies will continue to face pressure to intervene as their currencies appreciate in the face of the Fed's "money printing" policy.
Moreover, the threat of a "currency war" highlights the dilemma of the current global currency system.
As a sovereign currency, the US dollar also functions as the world's main reserve currency. Unfortunately, the two functions are contradictory.
To stimulate the US economy, the Fed resorts to printing more money, which may cause excess liquidity and depreciation of the dollar, further affecting international financial stability.
The world's main economies are trapped in a likely "currency war," which might hamper the recovery of the world economy.
Traditionally, a currency war refers to the situation in which one nation, relying on its strong economic power, buffets its competitors and seizes other nations' wealth through monetary and foreign exchange policies. However, there is no obvious evidence that many countries are conducting a "currency war" in this sense.
Actually the meaning of the so-called "currency war" right now is much more simple and specific: some nations, which are facing internal economic difficulties, devalue their currency to simulate exports and create more jobs.
If more and more nations adopt this kind of foreign exchange policy, the interest conflicts between them will get worse, damaging the recovery of the global economy.
Far from a war
The current situation is far from a war, although there is more conflict between nations' monetary policies. The Western media's hyping of a "currency war" has exaggerated divisions on currency policies and brought more tension to the international community.
It appears the cause of a likely "currency war" is the upgrading of conflicts on the yuan exchange rate between the United States and China.
Some other main economies also took action in this "war." The Japanese government launched a fusillade of intervention to hold down the yen in foreign exchange markets. Brazil, South Korea and Singapore used guerrilla tactics of doubling taxes on capital inflows to stop their currencies surging.
Yet the real cause of the likely "currency war" rests with the United States.
First, the United States is facing a sluggish economic recovery and high unemployment, and the economy has been a major issue of the November 2 midterm elections. Many US politicians have the impulse to use the yuan exchange rate issue as a scapegoat for the weakness of US economy. They highlighted the question of the yuan's exchange rate and intensified the dispute, making the yuan seem like the eye of the storm.
Second, the root cause is the Federal Reserve's massive printing of money in response to the financial crisis. The Fed adopted expansionary fiscal and monetary policies and infused massive liquidity into the market, which caused depreciation of its currency.
The result is that other related countries, such as South Korea, Brazil and Singapore, will face pressure to appreciate their own currencies versus the US dollar, posing challenges to their export and financial security.
These countries are forced to intervene in foreign exchange markets to hold down their currencies, thus forming a latent "currency war."
What should be noted is that the US has adopted a "double standard": in the eyes of some US politicians, it is reasonable for the Fed to "print money" to devalue the dollar but illegal for other countries to hold down their currencies to maintain their economic and financial security.
If the Fed continues to "print money" in the world's largest economy, it will lead to excess liquidity, depreciation of the dollar, and finally serious speculation of hot money.
The typical result is like this: if governments do not intervene in the market, a massive influx of dollars as hot money will generate new bubbles in stock and real estate markets of emerging and developing economies. And if the governments mop up the hot money by "printing money," inflation is likely.
Depreciation of the dollar may also cause commodity prices to surge. Situations like soaring oil prices and food crises will return. More important, if all nations adopt the foreign exchange policy of "beggar thy neighbor," the global economy will face a severe challenge.
During the 1930s economic crisis, many major economies abandoned the gold standard and devaluated their currencies, which led to protectionism and further harmed the economic recovery. It is a painful lesson.
Real cause
The real cause of the "currency war" is the US politicians' electioneering and money printing by the Fed. Still, some American politicians and a few Western media not only distort the truth, but also press China to take the responsibility or even discredit China.
Some people even proposed that as a "responsible stake holder," China should accelerate the appreciation of yuan to avoid the outbreak of a "currency war."
As an old Chinese saying goes, he who ties unties. The yuan exchange rate is not the main cause.
Even a large appreciation of the yuan will not solve the problem. Other emerging and developing economies will continue to face pressure to intervene as their currencies appreciate in the face of the Fed's "money printing" policy.
Moreover, the threat of a "currency war" highlights the dilemma of the current global currency system.
As a sovereign currency, the US dollar also functions as the world's main reserve currency. Unfortunately, the two functions are contradictory.
To stimulate the US economy, the Fed resorts to printing more money, which may cause excess liquidity and depreciation of the dollar, further affecting international financial stability.
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