Currency war, also known as competitive devaluation, is a situation where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particularly currency goes down so does the real price of exports from the country. Imports become more expensive and that helps the domestic industry increase sales. Of course, a currency war triggered by one nation could bring retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.
Guido Mantega, the Minister of Finance of Brazil, announced on September 27, 2010, that the world is “in the midst of an international currency war.” His view was accepted by numerous other government officials and financial journalist from around the world. During this time the United States complained over the evaluation of the yuan in China. The United States accused China of keeping the price its currency artificially low in order to keep United States and other nations exports out of China, thus creating an enormous trade imbalance against the United States and other countries. Of course, the United States was not an innocent bystander since it engaged in massive quantitative easing (QE).
Quantitative easing is the practice in which a central bank, such as the Federal Reserve Bank of the United States, tries to fight a recession or to stimulate a slow-growing economy by increasing the money supply of the nation. The enormous annual deficits of the federal government in excess of $1 trillion over several years have increased the federal debt to more than $17.3 trillion. Sadly, the real debt of the United States, when one includes the enormous debts of the states, counties, and municipalities as well as the unfunded entitlements of Social Security, Medicare, Medicaid, and Obama Care, is estimated to be in excess of $150 trillion.
James Rickards, an advisor to the CIA and the Pentagon, wrote Currency Wars: The Making of the Next Global Crisis (2011) describing the dangerous battlefield of global finance. He pointed out how China is purchasing secretly up to 4,000 tons of gold. Some believe that China has already over 5,000 tons of gold since it is acquiring gold mines throughout the world and continue to purchase secretly more gold. Rickards also wrote on the hidden agendas of sovereign wealth funds of nations that hate us which may attack the United States financially. Rickards is convinced these two situations are a very real threat to the collapse of the dollar.
James Rickards wrote that the Federal Reserve attempts to prop up economic growth could be devastating for our national security. He argues that a financial attack against the United States could destroy the confidence in the dollar. He believes that the policy of quantitative easing by the Federal Reserve would lead to a lack confidence in the dollar which could create chaos in the global financer markets. Rickards argues that we are currently going through a third currency war based on competitive devaluations. He believes that competitive devaluations are in race to the bottom, and those instruments are a sort of warfare. He argues that the continued depreciation and devaluation of the dollar will ultimately lead to a collapse, which will come about through a widespread abandonment of the U.S. dollar.
Rickards explained that the two previous currency wars ended badly. The first one brought about the Great Depression and World War II. It was started when Germany, unable to pay back the enormous war reparations to Great Britain, France and other countries after being defeated in World War I, decided to seriously devalue the German mark. The other countries did the same with their currencies as well as the United States. Soon high tariffs were imposed and world trade collapsed. The world-wide Great Depression resulted in Adolph Hitler and Benito Mussolini coming to power in Germany and Italy.
The second currency war of 1971 was started by Charles De Gaulle in France. President Richard Nixon was forced to abandon the gold standard and imposed for a while price controls in order to protect the value of the dollar. While the outcome of the current currency war is still uncertain, our nation needs to prepare to make certain that our economy and our currency are not destroyed by nations that wish us harm.
Geoff Dyer wrote a book entitled The Contest of the Century: the New Era of Competition with China– and How America Can Win (2014). Dyer is a former British Financial Times newspaper bureau chief in Beijing and who lived in China for many years. He argued that the real currency war for the next few decades is the contest between China and the United States over which currency will prevail as the global currency.
Dyer described in detail the ambitious plan to allow the Chinese currency to play a larger role in the global economy. A HSBC’s Chinese economist stated the following: “We could be on the verge of a financial revolution of truly epic proportions. The world is slowly, but surely, moving from greenbacks to redbacks.” Another Washington-based economist said that the Chinese renminbi could become “the premier reserve currency by the end of this decade, or early next decade.” China has designated Hong Kong and the international place for the world’s new global currency, the renminbi. HSBC predicts that by 2015 at least half of China’s trade with the developing world, approximately $2 trillion, will be in renminbi.
Dyer, explained that the issue of whether the renminbi will supplant the dollar is one of the central contest that will determine the shift of power from the United States to China over the course of the next few decades, a combination of high finance and geopolitics. He wrote that the National Intelligence Council, which publishes the United States government’s official intelligence estimate stated the following: “The fall of the dollar as the global reserve currency… Would be one of the sharpest indication of the loss of the United States global economic position, strongly undermining Washington’s political influence.”
Both China and Russia have announced that they want to destroy the dollar as the global reserve currency. If they were to succeed in displacing the dollar with the Chinese currency, America will no longer be a superpower. Both China and Russia believe that the United States under the Obama administration has become “a paper tiger” and that the United States is a superpower in retreat and decline.
Hillary Clinton shortly after she became Secretary of State stated “how do you deal toughly with your banker?” China has the largest foreign exchange reserves in the world, at around $3.3 trillion. It is estimated that China owns around $2 trillion of United States government’s debt. Never before has the United States depended on a single country’s government for so much financing. Obama’s irresponsible annual deficits and his refusal to reform the entitlements have put our national security in serious danger. Our nation is facing a fiscal abysm.
When the United States announced in 2010 that it wanted to sell more weapons to Taiwan, three generals of the People Liberation Army said that China should retaliate by selling U.S. government debt, which could lead to a sharp rise in the United States interest rates. Reporters have written in Chinese newspaper what they call “the nuclear option”, which is a threat to dump dollar bonds in order to change American policy.
There is no question that China wants to destroy the dollar as an international currency. China’s President Hu Jintao said in 2008 that he wants a “new international financial order that is fair, just, inclusive and orderly.” Dyer explained that by the end of 2012, around 15% of China’s trade was being conducted in renminbi. He wrote that one Chinese academic said that ending the dominance of the dollar is as important for China’s ability to project power as was China become a nuclear power.
During the 2007 war games in Russia, with the leaders of the military alliance the Shanghai Cooperation Organization (SCO) member nations in attendance, including Chinese President Hu Jintao, Russian President Vladimir Putin stated that Russian strategic bombers were going to resume regular long-range patrols for the first time since the Cold War. Putin said the following: “Our pilots have been grounded for too long. They are happy to start a new life.” Iran is not yet a member of this alliance. It is an observer nation. An Iranian official said at the meeting that “the SCO is a good venue for designating a new banking system which is independent from the international banking systems.” The Russian leader stated the following: “We now clearly see the defectiveness of the monopoly in world finance and the policy of economic selfishness. To solve the current problem, Russia will take part in changing the global financial structure so that it will be able to guarantee stability and prosperity in the world and to ensure progress. The world is seeing the emergence of a qualitatively different geopolitical situation, with the emergence of new centers of economic growth and political influence.”
Geoff Dyer wrote the following: “There certainly is no shortage of reasons for thinking that the United States could be heading for the sort of crisis that would shake the foundation of the dollar era. The litany is a familiar one– high debt levels, chronic budget deficits, political gridlock, spiraling entitlement spending, and crumbling infrastructure… It is not completely out of the question that the United States will suffer a financial convulsion. The downgrading of the United States government debt by Standard and Poor’s was a stark warning about the potential erosion of the confidence in the dollar. Ever since then, Washington has been living from one budget crisis to another.”
President Barack Obama and Congress need to put rapidly our financial house in order. Failure to do so will create hyperinflation, increased unemployment and a possible economic recession. Our nation needs to move aggressively to reduce government spending and our federal debt in order to protect the value of the dollar. China will surpass the U.S. economy in the next few years and China will continue working together with Russia to replace the dollar as the world’s international currency. Our nation needs to act now and reform all entitlement programs since all of them are unsustainable in the long-term. The United States needs start living within its means.
One of 3 articles on China:
EDITORS NOTE: The featured image is of the banner of the Wuchang uprising (zh:武昌起义) of October 10, 1911, subsequently used as the flag of the army of the Republic of China, ca. 1913-1928. It appears on many varieties of Chinese currency issued during the 1910’s and 1920’s. This image shows a variant of the flag with 18 yellow dots. This column originally appeared on Bear Witness Central.