"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Tuesday, September 28, 2010

Currency War On! The first finance official to state the obvious: "a trade war and an exchange rate war"

From the Wall Street Journal:
Brazil Warns of Global Trade War

The world is involved in "a trade war and an exchange rate war" as countries seek trade advantages by manipulating their currencies, and Brazil must take steps to defend itself, including the possibility of new taxes, Brazil Finance Minister Guido Mantega said in Sao Paulo on Monday.

Governments in several countries, including the U.S. and Japan, are allowing their currencies to devalue to gain market share in economies that are faring well, such as Brazil, the minister said, adding that Brazil needs to tighten up its antidumping laws to ward off this unfair competition.

So what does a finance minister do when such a circumstance arises? 
In addition, Brazil's authorities will buy more dollars through the spot market to help stem the currency's gains, Mr. Mantega said.

The government has already stepped up its dollar purchases, and its international reserves have grown to about $270 billion, not counting reserves also held by the treasury, which has also been buying dollars, he said.
Nothing really surprising here.  The imbalances accrued through global trade, and the government deficit spending spree of the past three decades pretty much created this obvious outcome.  In the end, there will be a rebalancing of global trade.  The question is, how will it occur?  I fear chaos and conflict is inevitable.

 

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