Currency Wars
July 19, 2014 8:16 AM   Subscribe

Currency Wars, or Why You Should Care About the Global Struggle Over the Value of Money In October 2010, the Brazilian Finance Minister made news by claiming an 'international currency war' had broken out. The term 'currency war' promptly became a buzz phrase with commentators and public officials warning about the dangers of these wars and their historical roots in the Great Depression. The U.S. government, in turn, has applied the idea to China, which it has accused of currency manipulation for the better part of a decade. So why does this matter? And how unusual is this all? Historian Steven Bryan puts currency wars in historical perspective and reminds us that currency policy is inextricably linked to national interests and that manipulation is the historical norm, not the exception.

Readers may also be interested in these two 1993 Origins articles on Global Monetary policy: International Monetary Policy: From a Fixed to Uncertain Future and Less Bang for the Buck: U.S. "Dollar Weapon" Policy in Historical Perspective. (Both PDF files)
posted by infini (25 comments total) 20 users marked this as a favorite
It's a lengthy article, so I haven't finished reading it yet. However, early on I wondered about the way the authors chose to represent the US currency (a single, crisp $1 bill) vs the Chinese currency (a disorderly pile of crumpled bills).
posted by jepler at 8:56 AM on July 19, 2014

I'm surprised there wasn't a single word on crypto-currencies.
posted by empath at 9:34 AM on July 19, 2014 [1 favorite]

The article is primarily concerned with providing a historical context for today's discussions of currency manipulation. Since there is no real historical context for cryptocurrency, and there's no path forward to a world where Bitcoin is the global reserve currency, I don't see why it would be included in such an article.
posted by tonycpsu at 10:00 AM on July 19, 2014 [8 favorites]

Is it possible and/or would we be better off to have one international currency? (Ignoring the years of fighting and effort to get such a thing implemented.)
posted by sneebler at 10:37 AM on July 19, 2014

no - look at the disaster that is the euro
posted by Another Fine Product From The Nonsense Factory at 10:49 AM on July 19, 2014 [3 favorites]

The main reason to mention crypto-currencies in an article about currency manipulation is that they make it more difficult to manage currency controls.
posted by empath at 11:02 AM on July 19, 2014

Perhaps bitcoins will feature prominently in an article about the future of currency manipulation and the role that crypto currencies can play, rather than one about the past, say for example, long before there were computers. Otoh, I'm sure that there's a history of cryptocurrencies out there as well; this, however, isn't it.
posted by infini at 11:05 AM on July 19, 2014 [1 favorite]

empath: The main reason to mention crypto-currencies in an article about currency manipulation is that they make it more difficult to manage currency controls.

They would, if there were any reason to believe they'd amount to any significant portion of the global currency marketplace in the short or intermediate term. Again, this article didn't set out to talk about the future, but about where we're at now and how we got here.
posted by tonycpsu at 11:09 AM on July 19, 2014

Is it possible and/or would we be better off to have one international currency? (Ignoring the years of fighting and effort to get such a thing implemented.)

IANAE, but in the long term, absolutely, because it facilitates trade and the world would be richer. But in the short term it would move growth to efficient economies at the expense of less efficient ones, which would go through a painful adjustment until a new equilibrium was finally achieved - which I take it has been the process in Euroland in recent years.
posted by Segundus at 12:57 PM on July 19, 2014

Segundus: It's not at all clear to me that the euro is in the process of reaching equilibrium, or that the equilibrium point it may finally reach is a net gain for all of the countries involved.
posted by Grimgrin at 1:31 PM on July 19, 2014

In the long run is pointless - because the long run means a time period greater than the existence of a stable currency system - so what you mean is - in the ideal world we would only have one currency - but we never live in the ideal world because the population of an ideal world = 1
posted by Another Fine Product From The Nonsense Factory at 2:38 PM on July 19, 2014 [1 favorite]

I'm surprised there wasn't a single word on crypto-currencies.

It is because of they are a joke?
posted by Sebmojo at 3:13 PM on July 19, 2014 [2 favorites]

This isn't a good piece in numerous respects. In fact, all three linked articles have biases that I'm not even sure the authors are aware of. Historians have a pretty spotty track record when writing about these issues.

The thing that sets off alarms bells for me is the weird defense of China's renminbi policy while criticizing the Fed's QE. And while the historical pieces do, in fact, talk about the problems associated with the gold standard and fixed exchange rates, they nevertheless have an overriding goldbug tone.

Here's some things that Paul Krugman has written on his blog about currency exchange and the renminbi:
Capital Export, Elasticity Pessimism, and the Renminbi (Wonkish)

The Renminbi and US Manufacturing

An Issue Whose Time Has Passed
"Is it possible and/or would we be better off to have one international currency?"

Your question is generally answered by the technical idea of the optimum currency area. The short answer is that various ills of regional economic heterogeneities would be exacerbated by a single currency and for the benefits mentioned by Segundus to be realized, you'd need to have various mechanisms in place to ameliorate those problems.

The main two problems revealed in the Euro post-2008, and they are intimately related to each other, is 1) sovereign debt coupled to a currency you don't control means that if your nation encounters a severe economic downturn you can get caught in a vicious cycle of default; and 2) you have no big, effective levers to pull that will affect your regional downturn.

The first can be ameliorated by there being a "lender of last resort". That will stabilize the interest rates on sovereign debt and keep the vicious cycle of the first problem from happening. Up until very, very late in this mess, the European Central Bank did not in any way act as a lender of last resort and had no intention of doing so. This is because the ECB is primarily a creature of Germany and, to a lesser degree, France; and the Germans, especially, were and are violently opposed to lending any of the stressed peripheral economies any more money. Being a lender of last resort was never in the charter of the ECB nor does it have the ability to do this, directly. But, at the very last minute when things were looking like they were going to blow up for not only Greece, but Spain and Italy, then the ECB did various things to signal that it would act as the lender of last resort, one way or another. Since then, rates on sovereign debt have fallen or stopped rising and the vicious cycle has been (mostly) interrupted.

The second can be ameliorated by there being factors that accomplish the same purposes. Inside national economies where there are regional differences, this is accomplished by various stabilizers, chiefly fiscal policy. The recession in the US was not uniform throughout the country, some states and regions within states were hit much harder than others. But in integrated national economies, you have all sorts of things that will counteract this, some official and institutional and others informal. Informally, you will have labor mobility. Formally, you will have things like unemployment benefits and other income support that act as financial transfers from the comfortable or less-stressed regions to the more-stressed regions. This stabilizes the economic situation, which, not coincidentally, has a lot to do with the debt problem, too.

So what this means is that it's not even the case that various national currencies function well for all its residents when they don't include these ameliorating factors. The US generally does have these things, though it could be better. Some are much worse.

Comparing the entire world's various economies to the Euro area tells you the answer to your question. By world standards, the Euro is integrated and homogeneous with some ameliorating mechanism. Even so, it's clearly right on the boundary of being broken as it's structured right now. A world currency would see these sorts of problems magnified a thousandfold -- it would be terrible. The benefits you and others would imagine from it would be vastly overwhelmed by the costs.

But, at some point in the future? Sure. Given the necessary preconditions.
posted by Ivan Fyodorovich at 3:37 PM on July 19, 2014 [7 favorites]

Actually blind signing based digital cash systems remain quite a serious option, Sebmojo. And bitcoin itself is not a joke per se but a temporary transitional phase

Ideally, Bitcoin should never become a serious global reserve currency because (a) Bitcoin creates atrocious, well only a few people own virtually all the BTC, and (b) Bitcoin wastes an atrocious amount of electricity. Ain't too likely Bitcoin will stick around though because (a) Bitcoin cannot adapt as the technology evolves and (b) any nation can make their currency better than Bitcoin in every way.

How does a nation make themselves a global currency and kill off Bitcoin, Visa, etc.? It appears relatively straightforward : Create a national digital cash system based on blind signing that's tax supported and free to use. Bitcoin is only pseudonymous while blind signing is *actually* anonymous. Bitcoin transactions take time while a digital cash system works quickly. Bitcoin has no actual underlying value while a national currency are imposed upon populations. And this makes most national currencies more stable than bitcoin.

Would the U.S. bitch if say Argentina created such a digital cash system? Yes, Visa owns an awful lot of politicians, so the U.S. would bitch about the blind signed cash being used by drug dealers, but that doesn't mean the U.S. could stop em'.
posted by jeffburdges at 4:04 PM on July 19, 2014

It is because of they are a joke?

I am now quite seriously preparing to help with some mix of lobbying/protest/public comment on behalf of a literal joke. I prepared a quick helpful snapshot of four jokes to illustrate, but only one of them is funny.

You'll note this is symptomatic of a broader and more important trend - administrative official Ben Lawsky of New York City (did I say City? of course we all know it is New York State, hehe) is basically having a go at setting Bitcoin law for all of America and to some extent the world. Already Austin is touting a friendlier environment and people are talking about seeing if California will make a better law, though to some extent it must be kept in mind that this proposal likely represents an opening negotiating position.
posted by save alive nothing that breatheth at 4:28 PM on July 19, 2014 [2 favorites]

Regulators who want to regulate? How dare they!
posted by tonycpsu at 4:55 PM on July 19, 2014

You say that like regulatory capture is not a thing.
posted by save alive nothing that breatheth at 4:57 PM on July 19, 2014 [1 favorite]

Yeah, and people break the speed limit all the time. Better just get rid of those.
posted by tonycpsu at 4:59 PM on July 19, 2014 [2 favorites]

I'm in the camp what wanted to see regulations, but these seem to cut the whole thing down into a better tech for Visa and Western Union to save on expenses. Believe it or not "regulations" can take different forms, can be good, bad, overreaching, insufficient. Believe it or not there are actually restrictions currently not present I'd like to see inserted, though they may be out of scope for this venue...
posted by save alive nothing that breatheth at 5:08 PM on July 19, 2014

Well, I read Lawsky's IAMA, and the excerpts of the regs I saw quoted in there seemed sensible -- the kind of basic things you need to have in place when something's being used as a medium of exchange between two parties in an economy.

But yeah, maybe we should table this discussion until the next Bitcoin-specific thread, so I'll close with this.
posted by tonycpsu at 5:15 PM on July 19, 2014

The problem with the Euro is not the currency but the politics. If Europe was one political entity without internal protectionism then most of the problems would evaporate.
However this is sometimes not in the interest of other trading blocs.
posted by adamvasco at 6:15 PM on July 19, 2014

TIL some people have no clue what a disaster is.
posted by 3mendo at 10:08 PM on July 19, 2014

It looks like the author is probably running some sort of hotkey program, as nearly every case of the word "default" has been replaced with
posted by RowanYote at 8:24 AM on July 20, 2014

"reserve" not default
posted by infini at 10:02 AM on July 20, 2014

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