This is getting serious. The currency war between the world’s powers is expanding beyond the typical Japanese intervention, Chinese yuan pegging, and aggressive U.S. quantitative easing to include, “Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland,” according to Ambrose Evans-Pritchard.
But what does this mean, and why is it happening?
Essentially, all the easy money flooding the market through U.S. quantitative easing is making the dollar weak and increasing the value of other currencies. Japan is front and centre here, worried one of its chief export markets could be priced out of purchasing its goods.
Simultaneously, it is making U.S. goods more competitive, which means emerging markets countries like China, Brazil, Mexico etc. al. need to move in to devalue their currencies against the dollar.
And this whole process spirals and spirals and spirals…until someone does something different.
That different approach could be capital controls, according to Ambrose Evans-Pritchard.
Right now, money is flowing into emerging market investment funds and commodities. Capital controls would put up walls against foreign money flows coming into each economy.
Brazil has, notably, already engaged in this, but it hasn’t helped much.
The next step would be tariffs on key industries. These would protect jobs by reserving demand in the domestic economy. But tariffs will eventually merit a similar response from foreign governments impacted, who will respond and damage you’re exports anyway.
It is simple prisoner’s dilemma game theory. Both parties will get to a point where they can’t trust the other, (the power of international organisations like the WTO ebbs) and they engage in a tariff. The other party does the same, even though both gain more by not having the tariff, because they don’t want to just have losses on the deal.
Now the U.S. House of Representatives is voting on a bill that would allow them to apply tariffs to Chinese goods unless they revalue their currency.