IMF Meets And The Result Is That Global Currency Cooperation Could Be A Thing Of The Past
The exchange rate of currencies are not typically something the average person watches unless they are planning a trip to another country. In that case they are watched to gauge whether that vacation is going to be cheaper or more expensive.
These exchange rates, and to a greater extent the policy of a country towards its exchange rate with other currencies, does now bear watching.
Feelings are rising in some quarters that the idea of cooperation between countries to keep currencies stable may be coming to an end. The reason is fairly simple but the end result may be painful.
Countries around the world that are facing severe recession at home, would like to put an end to that recession or at the very least keep it from getting worse, by somehow increasing the production of, and demand for, its domestic goods. This would have the effect of boosting corporate bottom lines and put people back to work. How to accomplish this? One simple idea is to make your products cheaper for other countries to buy, and the products of other country's more expensive for the people in your country to buy.
This, it is thought by some, can be accomplished by keeping the home country's currency weak relative to other currencies. That would accomplish the goal of making exports cheaper and imports more expensive. It can be a little confusing, but here is an example:
If the dollar and Euro were exchanged at 1:1, then a $100 product in the U.S. would cost 100 Euros for a European converting to dollars, and that same product would cost an American 100 Euros if they had to convert dollars to Euros. That is a little simplistic, so let's look at an actual case of the dollar Euro exchange in May and yesterday.
May 10, 2010 it took $1.30 to buy 1 Euro, which meant that if an American had to convert dollars to Euros to buy a 100 Euro product it in Italy, it would cost that American $130. For a European converting Euros to dollars, however, buying that same product in America would cost them only $77 dollars or so.
At the exchange rate yesterday, the ratio for converting the U.S. dollars to Euros was $1.38:1, which means it would cost $138 to buy that same 100 Euro product in the example above, and for the European converting Euros to dollars to buy that same product in America, it would only cost them only $72.
The spread of the cost between Euros and dollars in the first example was 53, and in the second example 66. This is a significant change.
The exchange rates in China pose global problems because many feel that the Chinese government is keeping the yuan artificially weak to keep its products cheap and its people working. This fact has inspired the Currency Reform and Fair Trade Act that would impose tariffs on Chinese goods determined to have an unfair advantage due to China's weak currency.
This example gives you an idea of why a country might want to keep it currency weak, particularly in a recession. More exports, less imports. This is a chart of the dollar versus the Euro since May 2010 that shows that the cost of imports for America have been rising, and exports to the Euro Zone becoming less expensive.
What If A Trade War Based On Weak Currencies Were To Occur?
These are some of the comments that came out over the weekend, pointing out the fears some have regarding the impact that a global "every man for himself" currency policy could have.
Said the head of the IMF Dominique Strauss-Kahn in a statement that sugar coats the possible end result of a global currency war, "The idea that there is an absolute need in a globalised world to work together may lose some steam."
Said George Soros about the weak Chinese currency, "China has emerged as a leader of the world. If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it."
The Premier of China, Wen Jiabao, said this about calls for China to strengthen it's currency, "If the yuan is not stable, it will bring disaster to China and the world."
Stephen Roach of Morgan Stanley said of the Currency Reform and Fair Trade Act, "I think that's a very bad piece of legislation, and one that would have devastating consequences for China and the United States. This is lose-lose. It's bad for everyone."
The main beneficiary of a currency war in which people will be looking for something that possesses tangible value? Gold which is now close to $1400 an ounce! Keep watching.
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