Is a currency war about to erupt?

30th August 2011

But the reasons are different in all three countries.

The UK is seen as a haven as a result of austerity measures put in place by the Chancellor George Osborne. It is viewed in a favourable light by some investors certainly in comparison to the Eurozone but it hasn't helped UK manufacturing where growth has tailed off recently.

Australia's currency has risen in recent years on the back of a mining boom whereas Brazil has suffered as have other emerging markets from a currency that has strengthened relative to the US, particularly because quantitative easing has pushed the dollar down.

In considering the UK situation, Guardian economics correspondent Phillip Inmann writes: "The [situation now] is almost an exact description of the UK in the mid 1990s and has led many analysts to conclude that the collapse in manufacturing under Labour was simply down to the £1 to $2 exchange rate.

"Economists call it "Dutch disease" – after the experience of the Netherlands whose manufacturing sector withered after its gas industry took off in the 1960s and sent the guilder soaring."

But it isn't only the UK papers that are concerned.

In Australia, the Sydney Morning Herald reports that Prime Minister Julia Gillard is under pressure to hold a Government inquiry into the future of Australian manufacturing as steel firm BlueScope Steel cuts a thousand jobs.

The unions in Australia are asking that the Government audits mining firms – a booming sector – to see how much Australian made steel they are using.

One rough comparison tool, which tries to calculate if currencies are really overvalued is the Economist's Big Mac index.

The index compares the price of the burger internationally as a rough calculation of purchasing power parity. It found that the Brazilian currency – the real – was overvalued by 149 per cent.

Perhaps more surprisingly it also found that the Chinese currency is slightly overvalued rather than undervalued which would confound the belief of some analysts, though for the first time this survey took GDP into account as well.

Pragmatic Capitalism believes we came pretty close to a currency war last year.

This was its take. "What we are actually facing is an all-out global currency war and old-fashioned "beggar-thy-neighbor" policies where every nation tries to devalue its currency to create more exports in order to boost its economy at the expense of every other nation."

Back on the Guardian, harbinger isn't convinced by Inman's arguments.

He writes: "A misguided article. Exchange rates may have a bearing on exports but the facts remains that the massive drop in the value of the Pound did nothing to revive industry. It is a lame excuse for not having a manufacturing industry of any depth or significance — which is the real disease from which Britain suffers.

"Yet British economists or rather scribblers for newspapers are all to ready and always have been to blame exchange rates for the lack lustre performance. Clearly this argument does not hold up for say Germany, which saw a long and sustained rise in the value of the Euro after its introduction yet continued to remain among the world's top three exporters."

Spike Barnes says the UK economy lacks balance.

"Once again the appreciating currency is bad for manufacturing fallacy repeated yet again. Japan has had (and Germany prior to union) had a strong currency policy.

They were and still are manufacturing powerhouses. They have wealthy citizens. Money flowing into your country is bad only if the money flows into housing, land and property causing asset price inflation, instant "unearned"profits and hence destroys the incentive for investment in the real economy. This is the FIRE economy (Finance and Real Estate). If capital gains was increased on sales of land and property at a punitive level then there would be no incentive for the hot money to flow into your country to gain from the free lunch of rising asset prices.

"The money instead would have to be invested in the "real" economy producing real wealth. Housing costs would remain affordable. Unfortunately the FIRE economy will continue to eat the REAL wealth producing economy until tax is moved back onto property and land instead of income and VAT."

 

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