"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

Saturday, October 2, 2010

Dominique Strauss-Khan and the "Unlikely" Currency War He Feels the Need to Prevent

In my recent post Currency War On! The first finance official to state the obvious: "a trade war and an exchange rate war",  I mentioned that Brazil's Finance Minister was the first Finance Minister to publicly describe a currency war.  As I quoted from the Wall Street Journal:
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.
On that same day in The Wall Street Journal another article stated IMF Managing Director Dominique Strauss-Khan (emphasis mine):

International Monetary Fund Managing Director Dominique Strauss-Kahn said Tuesday he doesn't rule out a global currency war, but thinks it unlikely.

As a potential liability, Strauss-Kahn said it's a concern. But, "I don't feel today that there's a big risk of a currency war," he said at a press briefing here.

Following Tokyo's recent yen intervention, Brazil's finance minister said he believes the world is involved in a trade and exchange-rate war, with countries seeking advantages by manipulating their currencies.

The IMF managing director said officials at both the Fund and the Group of 20 nations were actively working to prevent such a global battle of competitive depreciations and the issue would be a topic at upcoming summits.

Given the potential repercussions--especially in the midst of an anemic recovery and the IMF urging international cooperation to rebalance the global economy--Strauss-Kahn said the the probability for a campaign of depreciations "is rather low."

"There is no good to expect from intervention," he said. "History has shown that the effect of this kind of intervention doesn't last for very long."

Either a low-key intervention is ineffective or strong action invites destructive retaliation.

But just yesterday, in Yalta, AFP reports (emphasis mine):

Some economies, especially China, have been criticised for keeping their currencies low in order to promote their exports and Brazil's Finance Minister Guido Mantega has said the world is seeing "an international currency war."

"We succeeded in avoiding a bigger crisis thanks to economic coordination especially in monetary policy and in fiscal stimulus," Strauss-Kahn told reporters at the conference.

"But today we have another threat which is that this willingness for consensus and cooperation has decreased. And we see around the world a possibility of the beginning of a currency war."

He said the economic policymakers needed to get back to talking about cooperation, "discussing the value of the currencies, trying to adjust what has to be adjusted, fighting against global imbalances."

He said that if they didn't, there would be a new crisis "of countries trying to find domestic solutions to a global problem."

Sorry Mr. Strauss-Khan, but we're already there.  I understand that a person in a position of power and influence must measure his words, lest he make matters worse.  But one also needs to maintain credibility.  Remember Mr. Ben (growing troubles ... of the problems in the subprime markets seems likely to be contained,") Bernanke?

This is a major issue coming up at the IMF meeting this week.  As I follow these events, I can't help but wonder how currency wars  and resultant major depressions and wars took place in the past.  It was rarely one specific event that caused them, though in hindsight we like to simplify our history and tag such an event as the locus. 

Rather than fall for the simplification of history, we need to remind ourselves that a slow incremental series of events build up the momentum for a larger event:  a global economic or military conflict, etc...  Thus we are witnessing a turning point in world affairs.  Right now.  Yes, there is an ongoing global financial crisis.  But just as important as the roots of that crisis are, and how nations individually are reacting to the crisis, is another issue: can the world cooperate to address this crisis to avoid something greater.  I agree with Strauss-Khan's concern that only a global cooperative framework is the solution.

And what of the SDR?  Many have hypothesized that the SDR will be the new global currency, and according to some IMF reports, it seems like the process is ongoing.  Funny thing is, no country is exactly acting like they are ready for the transition to an SDR.  No, every country is now looking out for #1, so to speak... their own currency.

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