The so-called “currency wars” have been headline news here in “export or die” New Zealand. Most of the US press has been focused on China and its refusal to devalue the yuan. However here there has been more concern about the breakdown of IMF talks at the beginning of October.

Apparently, not just China, but 16 countries – including Japan, Brazil and South Korea – have been devaluing their currencies to make their exports cheaper on the world market. Here in New Zealand we know only too well how this works. Our two main export industries – dairy and tourism – are deliriously happy when the New Zealand dollar drops below $US 0.66. We still charge the same for our milk solids and excursion packages. But because other currencies have suddenly increased in value (relative to ours), our products are suddenly cheaper than those of our competitors.

How to Devalue Your Country’s Currency – Fast!

The main way most countries (including the US – this is the real reason interest rates are 0.25%) devalue their currencies is by reducing their interest rates. This causes investors to sell their treasury bonds and buy bonds in the currency of countries paying higher interest rates. Some governments help this process along by dumping their own bonds.

All this can spell disaster for small business, of course – and even some large businesses. Here in New Zealand, you can wake up one morning and find the kiwi dollar has risen to $US 0.78 and your business has been wiped out – because your product is suddenly 15% more expensive on the world market and no one will buy it.

The purpose of the IMF meeting two weeks ago was to draw up an agreement for countries to act collaboratively in managing exchange rates – rather than unilaterally (and aggressively – as happened with Greece earlier this year). Unfortunately the meeting was a failure. However at the G20 yesterday, a concession was made to allow the BRIC (Brazil, Russia, India and China) economic powerhouse two of the European seats on the IMF (in 2012 and with the US retaining veto power).

Pursuing Export-Driven Recovery

It seems that most of the G20 nations have given up on a consumer-driven recovery to the global financial crisis. Because a consumer-driven recovery would only be possible if we put people back to work (which would mean taxing the wealthy more to create public sector jobs) – and if we paid workers enough to buy the products manufacturers create (which would mean paying CEOs less and increasing the minimum wage). And since no one is willing to do either, the G20 counties have seized on export-driven recovery as the only solution. Thus the mad dash for countries to increase exports by devaluing their currencies.

Joseph Stiglitz’s Proposal

Former World Bank economist Joseph Stiglitz proposed ages ago that the easiest way to solve this problem was to create a separate reserve currency – independent of the dollar and euro – which would eliminate the need for individual countries to buy and sell each others’ currencies like crazy. Stiglitz, a Nobel Prize winner in economics, has a lot of good ideas about monetary reform. However he tends to put the public good ahead of Wall Street, so nobody listens to him.

China: Propping Up the Dollar – and the Euro (?)

I’m sure it must really annoy Obama that the US dollar hasn’t dropped nearly as much as it was supposed to (it’s dropped considerably – from $NZ 2.00 to $NZ 1.30 in the eight years I have lived here). In addition to refusing to devalue the yuan, the Chinese actively prop up the dollar by buying US Treasury bonds (someone has to and Saudi Arabia seems to have lost interest in buying our debt).

The other currency doing really well, thanks to Chinese intervention, is the euro (see http://www.therealnews.com/t2/component/content/article/54-william-engdahl/450-a-surprise-boost-for-euro-from-china). Though it’s received very little attention in the US media, China has stepped in to guarantee the Greek debt, and has already begun to purchase Greek treasury bonds.  The Chinese thought it was quite ungentlemanly the way George Soros, Goldman Sachs, Bank of American and the US credit rating agencies attacked the Greek bond market earlier this year.

China has also agreed to guarantee the debt of any euro country (including Spain, Italy and Ireland) coming come under similar attack from US financial institutions in the future.

The Eurozone doesn’t seem terribly unhappy about their strong currency so far. It so happens that having a strong currency goes a long way towards making austerity measures more palatable. If you have to accept lower wages, pensions and unemployment benefits, it’s great to be able to buy more cheap imports with the little money you have.