A currency war has no winners

[CHIMO]

It's easy to see why some policymakers hope favourable exchange rates could put America's economy back on track.Amid growing fears of a Japanese-style malaise, the other options are either off the table or likely to be ineffective. Political gridlock and soaring debt have stymied an effective second stimulus, and monetary policy has not reignited investment. But weakening the dollar to boost exports is a risky strategy – it could result in exchange rate volatility and protectionism; worse, it invites a response from competitors. In this fragile global economic environment, a currency war will make everybody a loser.

Fortunately, there's an alternative. Global co-operation based on growth-enhancing policies of structural reform, economic stimulus and long-term institutional changes in the global monetary system would be far more effective.

We know the dangers of devaluation because we've been here before. In the 1930s, beggar-thy-neighbour policies prolonged the Great Depression. In more normal times, the US might be able to make other currencies appreciate against the dollar – and help make US exports cheaper – by maintaining low interest rates and letting loose a flood of liquidity. But others, notably China, have signalled they won't play along.

The US must consider another path. History should be instructive. Forty years ago unilateral action by the US led to the breakdown of the Bretton Woods system, and the shift to the floating rate regime. Since then the global economy has been marked by unprecedented crises. Now the world is on the verge of moving to another regime of managed exchange rates and fragmented capital markets. This is not the result of extensive deliberations over what system would best serve all. Rather, it is the result of some countries taking actions they believe are in their own interest, without regard to others who do what they must to protect themselves.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/nov/01/currency-war-no-winners

[bemildred]

1. Oh yes it does.

Not the general public though, we get screwed.

[Yavin4]

2. Chinese Will Retaliate

No way they're going to allow the U.S. dollar to be cheaper than their currency. That's the whole basis of their economy. They will make their people work for free if they have to.