- Currency Wars: Causes and Consequences!
by Marc To Market, http://www.zerohedge.com/
The Realist understanding of international affairs is that it is a realm of competition. The competition is multi-faceted, taking place in politics and economics. It has a cultural dimension. It take place even in the writing of history.
This competition spills over into the foreign exchange market. It did not begin with the unorthodox pursuit of monetary policy in high income countries beset with crisis. Even at Bretton Woods countries were jockeying for advantage. From the time that the dollar-gold standard of Bretton Woods became operational, the foreign exchange market was politicized. The US wanted the German mark and Japanese yen, for example, to be adjusted higher, rather than devalue the dollar. The attempt to re-start Bretton Woods with the Smithsonian Agreement was shaped by the conflict of national interest.
This has also been the history of the floating rate era. The hot capital flows into Germany and Switzerland resulted in a policy response of intervention and negative interest rates in the 1970s. Some observers attribute the 1987 equity market crash in part to Treasury Secretary James Baker threatening dollar depreciation if Germany did not stimulate its domestic economy. When he was Treasury Secretary Llyod Bentsen threatened to allow the dollar to fall against the yen unless the Japanese government opened its markets more to US goods.
At times, the high income countries coordinated intervention such as under the 1985 Plaza Agreement. At other times, countries, such as Japan, were forced to act alone. Western European countries have repeatedly sought to minimize the intra-European currency fluctuations; from the Snake, through the ERM to finally getting rid of national currencies altogether.
Very few countries in the world seem to have ever felt completely comfortable with the prices that the foreign exchange market set. Indeed from Mexico’s Tequilla Crisis in 1995/95 through the Asian financial crisis in 1997-1998, a number of semi-fixed exchange rates were broken after numerous and costly attempts to defend them. The large build up of reserves in emerging market countries is largely, though not solely, a reflection of resistance to currency appreciation and the pursuit of neo-mercantilist developmental strategies. Most of the wealthy Mideast countries retain pegged currency regimes.