Same Currency War, New Battle Phase

By James Rickards

The current global currency war started in 2010. My book, Currency Wars, came out a little bit after that. One of the points that I made in the book is that the world is not always in a currency war. But when we are, they can last for a very long time. They can last for five, 10 or 15 years, sometimes longer.

And so it’s really not a surprise that here we are in 2014 talking about currency wars because it’s the same on that’s been going on. A lot of what you read or see on the TV is after some policy move by, let’s say, Japan to weaken the yen. And reporters will say: “Hey, there’s a currency war going on,” or “There’s a new currency war.”

I roll my eyes a little bit and go: “No, this is the same one, the same currency war; it’s just a new phase or new battle.”

So yes, it is going on. And it does have a lot of explanatory power. It’s one of the most important things going on in economics today. I think a year from now, I’ll be writing to you and we’ll still be talking about it.

What is a currency war, in a nutshell? They typically happen when there’s not enough growth in the world to go around for all the debt obligations. In other words, when growth is too low relative to debt burdens.

When there’s enough growth to go around does the United States really care if some country somewhere around the world tries to cheapen its exchange rate a little bit to encourage a little foreign investment? Not really. It’s almost too small to bother with, in the scheme of things. But when there’s not enough growth to go around, all of a sudden it’s like a bunch of starving people fighting over the crumbs.

Now everybody cares about currency cross rates because it’s a way to either import inflation in the form of higher import prices. Remember, when you lower your exchange rate, people in your country have to pay more for imported goods — and the United States is a net importer. We buy more from overseas than we sell.

The immediate impact of a cheaper dollar is to increase our costs — importing inflation — which is exactly what the Fed wants. How many times have you heard the Fed say they want 2% inflation? They analyze it over and over and over. We don’t have 2% inflation right now. It’s not even close. But they need to get there.

One of the ways they do it is to cheapen the dollar. The effect, of course, is it promotes exports. In the case of the United States, something like Boeing Aircraft, which are big ticket items, are competing with AirBus in France or Embraer in Brazil or Bombardier in Canada.

There are a few aircraft manufacturers around the world. Not that many, but we compete with them. And so a cheaper dollar, in theory, helps Boeing sell a few more planes. But from the US point of view, that could be jobs and growth in the US. So there are perceived to be benefits.

Now, a lot of those benefits are illusory. But it’s very, very appealing to politicians because he or she can stand up and give the speech that I just recited. Namely, “Hey, it’s good to have a cheap dollar because we promote jobs.” But the reality is, it doesn’t promote jobs. It just promotes inflation.

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