Among market monetarists, Lars Christensen has done a lot of ‘bashing’ (his latest here) on those that have the wrong view on the implications of what Brazilian Finance Minister Mantega dubbed “currency war” back in September 2010. The concept has come back into ‘fashion’ given Prime Minister Shinzo Abe´s ‘wish’ to rekindle Japan´s economy.
Someone got it right and this Economist piece by Greg Ip is a nice primer with lots of historical references and links to pertinent papers:
Brazil’s finance minister coined the term “currency wars” in 2010 to describe how the Federal Reserve’s quantitative easing was pushing up other countries’ currencies. Headline writers and policy makers have resurrected the phrase to describe the Japanese government and central bank’s pursuit of a much more aggressive monetary policy, motivated in part by the strength of the yen.
The clear implication of the term “war” is that these policies are zero-sum games: America and Japan are trying to push down their currencies to boost exports and limit imports, and thereby divert demand from their trading partners to themselves. Currency warriors regularly invoke the 1930s as a cautionary tale. In their retelling, countries that abandoned the gold standard enjoyed a de facto devaluation, luring others into beggar-thy-neighbor devaluations that sucked the world into vortex of protectionism and economic self-destruction.
But as our leader this week argues, this story fundamentally misrepresents what is going on now, and as I will argue below, what went on in the 1930s.
At the end, a veiled message to Mr. Mantega who, having ‘misread’ the reasons and implications of his own moniker, implemented wrong and inconsistent policies over the last 3 years and is now stuck in a ‘catch 22’ situation of low growth and above target inflation:
But Mr Eichengreen notes that unlike in the 1930s, today there is a large group of emerging economies who did not suffer a deflationary shock and thus would not benefit from easier monetary policy. Their optimal response, he says, would be to tighten fiscal policy, which would cool demand, putting downward pressure on interest rates and their currencies. But, as in the 1930s, he notes that there are political and institutional barriers to doing so, and instead they are opting for second-best policies such as capital controls, currency intervention, and in some cases, import restrictions.