What many people tend to not notice is while there are wars going on in the Middle East, a war is occurring that is affecting the entire world and could drastically change the United States- the currency war. While there aren’t actually people who are being killed, this type of war is in essence the same as a cyber war, in which certain aspects of a nation are attacked, pulling it into chaos, rather than attacking an army or citizens directly. In order to understand what exactly the currency war is all about, it’s vital to have a basic understanding of economics and how it plays into the collective world economy. First, you must understand that there are two types of countries when it comes to the economy: deficit countries such as America and the United Kingdom, and surplus countries such as China and Japan. The main distinction between the two is that deficit countries run on, of course, a deficit, which allows them to take in more than they put out when dealing with international goods. Surplus countries are the exact opposite; according to Laurence Knight, “they lend to other countries to help finance their exports.” This makes sense, considering America is a large buyer of foreign goods, and China produces a handful of cheap goods. In affect, the deficit spending allows countries like America to have a high value attached to their currency, in this case the dollar, while having a surplus will keep a country’s currency low in value, such as the Yen and Yuan. Economists who are familiar and knowledgeable about the former currency war, which occurred in the 1930s, are predicting that if the currency war as it is continues, then history will ultimately end up repeating itself.
The financial crisis in 2008 was in large a trigger of the current currency war. With not as much money to spend, deficit countries haven’t been able to purchase foreign goods, which in turn reduces the amount of exports that surplus countries are able to sell, causing a worldwide economic downfall. The situation becomes much more complicated when it comes to the recovery. According to the article on BBC.com, “The U.S. says it wants to export more, to help its economy recover. But the surplus countries don’t want their exports to lose their competitive advantage.” This last sentence outlines the main idea of the currency war- countries are racing each other, trying to get their currency to a lower value so other countries will buy their cheaper goods, thus improving employment rates in the country that is exporting the products.
Another main issue with the currency war is how it affects the citizens of any given country. In America, for example, we are faced with unemployment close to 10%, and a falling dollar. Before the financial crisis of 2008, Americans, living in an extremely deficit-run country, enjoyed an extremely high standard of living. This was because Americans had access to very cheap goods exported from surplus countries, allowing the dollar to have a large purchasing power. Meanwhile, in countries such as China, whose government has been seriously manipulating the Yuan to keep it artificially low, the Chinese citizens experience a much lower standard of living than Americans do. This gives the U.S. options of how it wants to deal with the issue. With the Fed’s main job being unemployment and inflation, many think that the dollar, as well as other currencies, will continue to weaken. If the U.S. is able to lower the value of the dollar relative to other currencies, job creation will boom in America, as we transform into an export-run country; one the other side, however, we wouldn’t be able to enjoy as much luxuries produced in foreign countries. If, however, the dollar remains higher in value in relation to other world currencies, even if overall the value drops, we could still have the same purchasing power, which might not change much.
http://www.bbc.co.uk/news/business-11608719
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