This book review was written by Eugene Kernes
“At the heart of every currency war
is a paradox. While currency wars are
fought internationally, they are driven by domestic distress. Currency wars begin in an atmosphere of insufficient
internal growth. The country that starts
down this road typically finds itself with high unemployment, low or declining
growth, a weak banking sector and deteriorating public finances. In these circumstances it is difficult to
generate growth through purely internal means and the promotion of exports
through a devalued currency becomes the growth engine of last resort.” – James
Rickards, Chapter 3: Reflections on a Golden Age, Page 45
“Each part of this supply and innovation chain will earn
some portion of the overall profit based on its contributions to the
whole. The point is that the exchange
rate aspects of global business involve not only the currency of the final sale
but also the currencies of all the intermediate inputs and supply chain
transactions. A country that cheapens
its currency may make final sales look cheaper when viewed from abroad but may
hurt itself as more of its cheap currency is needed to purchase various inputs. When a manufacturing country has both large
foreign export sales and also large purchases from abroad to obtain raw
materials and components to build those exports, its currency may be almost
irrelevant to net exports compared to other contributions such as labor costs,
low taxes and good infrastructure.” – James Rickards, Chapter 3: Reflections on
a Golden Age, Page 47
“Historically a currency war involves competitive devaluations by countries seeking to lower their cost structures, increase exports, create jobs and give their economies a boost at the expense of trading partners. This is not the only possible course for a currency war. There is a far more insidious scenario in which currencies are used as weapons, not in a metaphorical sense but in a real sense, to cause economic harm to rivals. The mere threat of harm can be enough to force concessions by rivals in the geopolitical battle space.” – James Rickards, Chapter 8: Globalization and State Capital, Page 141
Is This An Overview?
The value of the currency affects the value of every stock,
bond, and commodity. If a specific
market is having trouble, other markets need not be in trouble. But if the currency changes value, all
markets are affected. Reducing the value
of the currency can make domestic products cheaper to foreign buyers. Enhancing the competitiveness of the domestic
market. The problem is that there are
costs of benefiting the domestic economy.
Costs that foreign economies have to pay.
Making final sales cheaper can increase the amount of
buyers, but that does not mean domestic producers will benefit. In a globalized economy, products have
various sources for inputs, the resources need to make the final product. By cheapening the currency, foreign inputs
can become more expensive to domestic producers. Devaluation can cause inflation in foreign
economies, which foreign states have to deal with.
Cheapening the currency can benefit the domestic state, but
at the expense of competing states. As
competing states do not want to pay for the troubles in foreign economies, the
states react in a way to limit the harm done to them, at the expense of their
competitors. Competitors can protect
themselves from the devaluation of a foreign currency, by using policies that
devalue their own currency, or become protectionist by restricting trade. Currency wars are mutually destructive as
each competitor state shifts economic problems to their competitors.
Currency wars can devastate an economy to become disruptive
enough to require military intervention.
As a devaluation of a currency negatively affects competitor states, the
competitors can think of the devaluation as an attack on the state. Currency attacks do not need to begin with
state decisions, as nonstate agents are participants in the economy.
Caveats?
This book can be difficult to read without enough economic
background. The history, economic
policies, and trade events are generally presented by their outcomes, or
perceived outcomes. There is a lack of
various economic details about the interactions of decisions and policies, that
can prevent an understanding of the chain of events that led to the outcomes
presented.
Currencies shape economies, but economies are more than just
currencies. There are missing details as
to why certain states were affected due to currency revaluations, but not other
states.
