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Fear of currency wars is, like, so 2009

February 6 2013 Leave a comment

I responded to a comment underneath this article: Currency Wars, What Are They Good For? Absolutely Ending Depressions – Matthew O’Brien – The Atlantic.

RaiseTheBlackFlag

There seems to be one big problem with this argument. Unlike in the 30s, trade has not collapsed. Thus, the likelihood of a trade war, and consequent ill effects, are quite a bit higher. The effects on the American consumer of sudden price increases on Chinese imports, or their disappearance altogether due to a collapse in trade, could be quite severe.

oblivia

This comment (and article) would have been timely in about December 2008, when there were some legitimate reasons to fear a trade war (however irrational it might have been). Today, we already know the answer. It didn’t happen.

Instead, China printed massive amounts in 2009, as did most other large economies. And, after considerable strengthening of the yen, Japan is now benefiting from unorthodox monetary policy through Abenomics, and even India seems to be joining the party. But none of these countries are doing it to beggar their neighbours, which is the key point to understand. They are addressing problems in their domestic economies, which happens to have an effect on exchange rates (or not, in a world where everyone is doing the same thing).

Talk of “currency wars” is just marketing for a book of the same name. And best ignored.

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