The True Cost of Money
Tasker, Peter, Newsweek
Byline: Peter Tasker
Why countries are trying to manipulate their currencies.
The Japanese are doing it again. The South Koreans prefer to do it when nobody's watching. The Chinese are at it brazenly and on an enormous scale. The Swiss tried it without much success. All these governments are aiming to make their currencies cheaper, thus making life easier for their export industries and harder for foreign companies selling to their consumers.
Historically, Western governments have been too high-minded to manipulate currencies directly. That was considered to be the province of Third World despots with limited economic insight. Yet currency policy in the West has rarely been laissez faire. In the '90s, then-Treasury secretary Robert Rubin repeatedly assured the world that a strong dollar was in America's interests. Earlier the U.K. Treasury made the disastrous decision to "shadow the Deutsche mark," linking the pound to the world's strongest currency. In both countries policy-makers saw currency strength as a symbol of economic virility.
In the context of the times, that made perfect sense. Both countries spent most of the last 30 years living beyond their means. Inflation was relatively high; the natural tendency of the dollar and the pound was to fall. Bolstering confidence in the currency put a lid on inflation. It encouraged creditor nations to carry on lending--which allowed consumers to carry on spending.
Meanwhile, Asian countries favored their exporters--through subsidies, tariffs, and undervalued currencies. In the '80s and '90s the resulting imbalances were contained for two reasons. First, they were still small in relation to U.S. economic scale and power. Second, America was the ally and protector of the rising Asian powers. When Japan's surpluses became a political problem in the mid-'80s, the two countries engineered a massive appreciation of the yen, and Japanese auto companies began to build job-creating factories on American soil.
Conditions today could not be more different. In the developed countries, inflation is dead as a political issue. …