World War III – The Currency War
Are We Entering a Phase of Currency War?
After a long period that last for decades, we are now in a time, over the last decade or so, where wars are fought using currencies rather than using weapons. Countries realize that it is easier, cheaper and less violent to bring destruction to other countries by targeting their economies rather than targeting their military.
This is why we have been seeing currency wars between the major economies of the world which is essentially a race to keep their currency as low and as cheap as possible. Little do the countries realize that though such wars might be less violent, the effects are as devastating as conventional wars. In fact, such currency wars could lead to conventional wars as the countries and their people start looking inwards and care only about themselves and their country, look to dominate other countries after successfully destroying their economy.
Currency Wars Lead to Geopolitical Tensions
The major currency war right now seems to be between the US and China on the one hand and the US and Japan on the other with all these 3 economies going through a long QE program by printing more and more money to keep their respective currencies weak.
With Trump accusing Germany, Japan and China of manipulating their currencies to help their economies, the gloves are off and the spectra of currency wars looms overhead. China fully controls its currency and it sets the value of its yuan on a daily basis, this has helped China to push its exports into many markets around the world and becoming the clear leader as far as exports are concerned.
Moreover, This has led to a rash of cheap imported Chinese items in many parts of the world which has hit the domestic economies and manufacturing in an adverse manner. In some case, some domestic small scale industries in many countries have been destroyed due to the influx of Chinese products. The situation is the same in the US as well where the markets are flooded with cheaper Chinese items posing a grave risk to the American industry.
The same applies to the case between US and Japan which are also pursuing a trade war using currency, as the base of the Japanese government and the BOJ seek to pump in more and more money into the system to weaken the yen. It has to be said that the move has fairly succeeded over the few years as we have seen the USD/JPY pair move from around 75 to 115 as it stands now. This is likely to increase the tension between the two countries as they each accuse the other of weakening their currencies and launch themselves into a trade war where each country, not only the US, Japan and China, would try to weaken their currencies to boost their trade and economy. That would then lead to a situation where the currencies would lose their value leading to large inflation.
Trump and His Effect on the Currency Wars
It was unusual for a new President to speak about currencies but that’s exactly what Trump did when, within the first week of assuming charge, he accused Germany, Japan and China of currency manipulation.
Trump could escalate this issue into a full blown currency war and considering that his policies and his promises have been US-centric to keep the Americans and the American market out of reach of other economies by adopting an inward looking policy. We could see a period of change where more and more countries will start looking inwards and that could lead to the death of globalization as we see it now.
Globalization has been all about looking outward as countries helping each other out in order to grow their own economies and also helping other countries to grow their economies.
But this phase of looking inward would be made worse by Trump and his policies. Of course, the US could benefit in the short run as the goods become cheaper due to low value of the dollar, factories flourish as imports become costlier but they will start losing out on the quality of goods and also, it will be a race to the bottom as the value of currencies become lower and lower. This would also cause currency instability as the currencies lose their value despite the fundamentals pointing in the other direction, leading to increased volatility and less liquidity.
Currency wars threat global economy and political stability. With the arising power of nationalism across the world, first in the US and as we can estimate other countries will join the latest phenomenon, currency manipulation would be a major field that every person must follow.