Currency Wars explained
Monetary easing in the US has led to many complaints against it from Latin America, and in particular from Brazil which depends heavily on exports to the US. The current US Fed policy has led to the appreciation of many countries’ currencies against the dollar and some of their central banks have been forced to lower interest rates in response. Countries like South Korea and Taiwan are also making loud noises now as they are losing competitiveness against Japan with the current yen devaluation.
LESSoNS FRoM THE PAST Currency wars have happened in the past, with the best example being just after the Great Depression. In 1931, it was in fact the UK that started a currency war and which culminated with the end of the gold standard in 1936.
Following the Depression, and after suffering from rising unemployment and sluggish growth for several years, the UK decided to leave the gold standard for good and so let sterling devalue against other currencies. The measure was very successful for the country as the uk started recovering before other economies. When comparing with the devastation that enveloped the US economy — cratering GDP by almost a third — a level very similar to Greece today, the UK just went through a mild recession. Indeed, if we contrast this with the present day, we can see that the US has effectively followed the same path as the UK over the past 80 years. This explains why the US has been recovering in recent years with falling unemployment and nominal GDP now actually back above the level prior to the Great Financial Crisis, whilst those countries still in the mire like Southern Europe are tethered to a de facto gold standard — the strong and resilient euro.
CHART - US NOMINAL GDP
March 2013
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