My thoughts on the ‘currency war’
I spoke to the Russian TV broadcaster Russia Today and the popular Indian website DNA India late last week about the escalating rhetoric surrounding the forex market. The video from RT is not available yet but the link to the DNA post is right below. Let me summarize my view.
I believe the developed economies are already in a nascent currency war because domestic demand growth is weak in both countries with external surpluses (exporters) as well as those with external deficits (importers and consumers of last resort). The consumption demand weakness in developed markets has led to a zero-sum mentality which is dangerous and which risks escalating. Countries like Switzerland and Japan are attempting to stop their currencies from becoming more overvalued, while the U.S. is attempting to increase its currency’s undervaluation. The result has been a flood of liquidity in the developed economies. When the Brazilian finance minister voiced concern, it was clear that emerging markets were concerned that the flood of money produced by the developed economies was going to destabilise emerging market economies as well.
Policy makers need to take a step back and consider the risks of escalating rhetoric because they will find themselves with a significantly reduced set of policy options if it continues in this fashion.
Source: Bashing China and going to currency war is wrong and risky: Former US diplomat – DNA India
Update: Comments from Lagarde, Stiglitz, Roubini and Eichengreen in the Wall Street Journal video below are in line with my thoughts here about the need for less public rhetoric and more of a multilateral behind-the-scenes approach. I am sceptical hat we will get this. But it is what we should want.