The BBC’s economics editor Stephanie Flanders released this nice little 3-minute video which explains why the so-called currency wars are something you should care about. For me, it is quite significant that South Korea of all countries, the host of the G-20, has major political figures talking about capital controls on the eve of the G-20 summit.
While everyone is talking about the US and QE2, it isn’t axiomatic that the Greenback will actually fall against other major floating currencies because those economic areas also have weaknesses. And,regarding the flood of money, I should note that it is China, Japan and Germany which have the major capital account deficits i.e. are flooding the world with so-called excess savings. Why isn’t anyone talking about this?
My take on the American side of the story is that the US private sector needs to spend less and save more – full stop. But, after a massive bust it’s going to be hard for policy makers to accept this prescription because it spells slow growth and high unemployment. That’s why America is eager to get some aggregate demand by any means necessary.
(video embedded below)