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Currency Wars

12:00 AM, Feb 9, 2013 • By IRWIN M. STELZER
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Brazil, an experienced battler in currency wars, coupled its own devaluation with a plea for the World Trade Organization to permit it to raise tariffs on other devaluers. That idea has been bruited about in America, where leading Democratic politicians want to impose tariffs on made-in-China goods to offset the disadvantage America’s manufacturers face from China’s currency manipulation.  

Meanwhile, Britain is about to get a new governor of the Bank of England, Mark Carney, an import from Canada. Carney is unlikely to be a reluctant recruit to the currency war, although like all central bankers he will deny participation. A few days ago Carney told a parliamentary select committee that he will use all tools at hand to revive the British economy, including its export sector, and spoke approvingly of some of the goings-on in the U.S. at the instigation of the Fed. If sterling were to drop after Carney dipped into his tool kit, well, so be it.

It should be obvious that the currency war is a trade war by other means. The use of traditional weapons—tariffs to keep out imports and thereby increase demand for homemade products and create jobs—was outlawed by mutual consent of the warring parties when they agreed to abide by the rules of the World Trade Organization. So a new weapon of trade destruction has been rolled out—the printing press. Run the presses, flood the markets with your currency, and later, if not sooner, your currency will depreciate, giving you an edge in world markets. Until trading partners respond.

The U.S. and the UK, among others, have already deployed that weapon, and the new head of Japan’s central bank is likely to be chosen by Abe from the warrior class. Germany, not overjoyed with Draghi’s hint that he might take up arms, continues to insist that the ECB remain a non-combatant. Angela Merkel has made it clear that the long unpleasantness that followed Germany’s decision to run the money presses overtime in the 1930s is still etched in Germans’ minds, and that she agrees with Vladimir Ilyich Lenin that “the surest way to destroy a nation is to debauch its currency,” a view on which John Maynard Keynes put his stamp of approval: “Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

The difference between these two acute observers is that Lenin would be cheering the currency wars, Keynes bemoaning them. 

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