Byline: Satyajit Das
VOLATILITY of currency exchange rates has increased markedly in recent months. To paraphrase Oscar Wilde, the US dollar has no enemies but is intensely disliked by its friends, especially key investors such as the Chinese.
The euro is now the "Drachmark" (a derisory combination of the former Greek drachma and German deutschemark).
Investors assumed that the euro would be a new Deutschemark, supported by German commitment to fiscal and monetary rectitude avoiding Gallic and Mediterranean extravagance.
Instead, they have been left holding a currency underpinned by unexpected German extravagance and Gallic and Mediterranean rectitude. Despite sclerotic growth, public debt approaching 200% of GDP and a budget where borrowing is greater than tax revenues, the Japanese yen has risen to its highest level against the dollar in 15 years.
Fears about the value of any currency have seen a resurgent interest in gold. Traders are now reading their John Milton: "Time will run back and fetch the age of gold."
On 27 September, Brazilian Finance Minister Guido Mantega stated the obvious, speaking of an "international currency war" as governments around the globe compete to lower their exchange rates to boost competitiveness.
In the words of English philosopher Thomas Hobbes, it is "war of every man against every man".
Since the end of the gold standard and Bretton Woods, currencies increasingly have become weapons of choice in trade and economic wars. In the German and Japanese model of economic development, an undervalued currency is a key mechanism for maintaining competitive costs and high levels of exports to drive growth. Successive generations of emergent countries, most notably China, copied the model. The model is more problematic in a world of low growth.
As growth slows, maintenance of competitiveness requires businesses to manage costs brutally. Cheaper currency values assist in remaining competitive, avoiding the need to overtly cut costs by reducing wages or cutting benefits, explicitly lowering living standards. During the global financial crisis, the repeated manoeuvring of China, Japan and Germany to maintain the low value of the renminbi, yen and euro against the dollar was designed to maintain export volumes to cushion the worst effects of the recession.
To a large extent, it reflects the underlying structure of economies heavily geared to exports. Angela Merkel has repeatedly stated that she sees no change to the export-driven German economic model in the near term. For Japan, falling living standards combined with an aging, falling population means increasing dependence on exports. For China, increasing wages pressures and domestic inflation means that rising production costs must be offset by other means, including an undervalued currency. The problem of shifting models is great. In 1985, the Plaza Accord forced Japan to effectively revalue the yen, setting off a rise to 85 yen to the dollar from 230. The rise reduced Japanese export competitiveness and led to a recession. …