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Currency Wars, Again

February 26, 2015 in Economics

By Steve H. Hanke

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Steve H. Hanke

The specter of currency wars rises like a phoenix once again. This time around, most of the warriors reside in Washington, D.C.. The strong dollar has inflamed the currency warriors (read: mercantilists) led by Democratic Senator Chuck Schumer from New York and Lindsey Graham, a Republican Senator from South Carolina. These mercantilists argue that “cheap” foreign currencies give the U.S.’s trading partners an “unfair” advantage, something worth doing battle over.

About the only thing the mercantilists have right is the fact that the U.S. dollar has been strengthening. As the accompanying chart shows, the currencies of all the U.S.’s top trading partners have lost value against the greenback over the past six months. These losses have ranged from 1.8% for the Chinese yuan to 21.6% for the Brazilian real. Russia, the fifteenth largest trading partner of the U.S., has seen the value of its ruble fall 39.5% over the past six months.

So, the currency hawks want to do what they always want to do: go to war. The particular trigger is the Trans-Pacific Partnership (TPP), a trade agreement between Asian countries and the U.S.. With this agreement, which the Obama administration is pushing for, the currency warriors have spotted an opening. They want to insert enforceable rules against so-called currency manipulation into the TPP.

All this saber rattling is a broken mercantilist record, particularly with regard to the U.S.’s biggest Asian trading partners: Japan and China. Indeed, these two countries have accounted for the lion’s share of the U.S. trade deficit over the past twenty years (see the accompanying chart).

From the early 1970s until 1995, Japan was viewed by the mercantilists as an enemy. They asserted that unfair Japanese trading practices caused the U.S. trade deficit, and that the U.S. bilateral trade deficit with Japan could be reduced if the yen appreciated against the dollar — a “weak dollar policy.” Washington even tried to convince Tokyo that an ever-appreciating yen would be good for Japan. Unfortunately, the Japanese complied and the yen strengthened, moving from 360 to the greenback in 1971 to 80 in 1995.

In April 1995, Secretary of the Treasury Robert Rubin belatedly realized that the yen’s great appreciation was causing the Japanese economy to sink into a deflationary quagmire. In consequence, the U.S. stopped arm-twisting the Japanese government about the value of the yen and Secretary Rubin began to evoke his now-famous strong-dollar mantra.

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Source: OP-EDS

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