The Coming of the Money Wars
Tasker, Peter, Newsweek International
Byline: Peter Tasker
The Japanese are doing it again. The Koreans prefer to do it when nobody's watching. The Chinese are at it brazenly and, like everything else they do, on an enormous scale. The Swiss tried it, without much success.
The "it" is government interference in the foreign-exchange market. The aim? To make their currency cheaper, thus making life easier for their export industries and harder for foreign companies selling to their consumers. The big question is what this says about the shifting landscape of the post-crisis world.
Historically, Western governments were too high-minded to manipulate currencies directly. That was considered to be the province of Third World despots with a limited understanding of economic theory. Even so, currency policy in the West has been far from the benign neglect of free-market ideology.
In the 1990s, then-U.S. Treasury secretary Robert Rubin repeatedly assured the world that a strong dollar was in the U.S.'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 policymakers 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 past 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 kept the show on the road. It put a lid on inflation and encouraged creditor nations to carry on lending--which allowed consumers to carry on spending and politicians to carry on getting elected.
Meanwhile, Asian countries favored their exporters--through subsidies, tariffs, and, not least, undervalued currencies. In the 1980s 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, the U.S. was the ally and protector of the rising Asian powers. When Japan's surpluses became a political problem in the mid-1980s, 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. …