The Emergence of the Idea of Currency War
The current essay defines the specific characteristics of currency wars practice. The evaluation of the research conducted by James Rickards and other authors allows answering the question about the threat of currency wars for the modern world’s economic system. The article describes the origins of the currency wars concept, the process of its development, and the modern examples of the practical application of this concept.
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The evolution of human thought in the course of its historical development has affected many aspects of life and work. The ideas of warfare methods have also undergone a number of changes, caused by changes in the political, economic and social structure of the modern society. The common model of the war, as the aggressive clash of nations on the battlefield, is becoming less relevant in modern conditions. More relevant to less developed countries with low military capabilities, this model becomes simply disastrous for highly developed nations. The existing powers of states in modern military and nuclear capability makes any major military conflict form a threat to the stability of the global system and the planet, as a whole. This argument is particularly true for the United States, whose military potential superiors the performance of any other modern state (Rickards 13). The military and naval potential of the United States is so significant that it creates conditions for control over world’s trade streams (Friedman 5). Since the reasons for warfare in order to acquire resources and spheres of influence are present in the contemporary world, most countries have resorted to the use of war methods that are more sophisticated and less dangerous for the world.
In such conditions, Rickards stated that one of the methods of warfare that will occupy the leading place in future is the currency wars. Rickards claims that “a currency war, fought by one country through competitive devaluations of its currency against others, is one of the most destructive and feared outcomes in international economics” (31). The country, which is considered to be the aggressor in the currency war, deliberately reduces the exchange rate of its currency to be able to effectively trade in foreign markets. Such a monetary policy is common for countries that are able to export high-tech products or limited resources. At the same time, the idea of currency wars performance is not useful for states that are highly dependent on imports of raw materials and technologies.
The global threat that the implementation of the currency war tools can cause becomes possible due to the high level of integration and globalization of the international economy. In this way, the currency war (CW) is a product of the modern era in political and economic development. The rapid growth of globalization in 1990’s made it possible to use the methods of currency’ devaluation in the United States to cause the economic and social collapse in China, India, the Middle East, or any other part of the modern world (Rickards 96). The United States owns the largest ‘military’ capabilities in the event of the CW, since the dollar is the key world’s reserve currency.
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It would be a mistake to say that the currency devaluation is the only way of currency warfare. Rickards stated the interesting idea that the possession of natural resources, especially energy, could put the state in the most advantageous position and allow it to dictate the terms of international trade. In his book, Rickards discussed the likelihood of a situation in which Russia uses its relative monopoly on the energy market to promote new alternative currency of international circulation. Such an event could weaken the importance of the dollar in the global system of finance and would undermine the economic potential of the United States. As a result, such conditions could cause a crisis in the U.S. economy and military spheres.
The variety of means of a currency war, depending on the desired result, suggests a high degree of flexibility and the potential of these tools to resolve international conflicts. In the face of the deteriorating international situation, it is extremely important to monitor and evaluate possible scenarios of currency wars.
The Pros and Cons of Currency Wars
The practice of the currency war strategies implementation showed the considerable effectiveness of this tool in resolving the problems of individual countries. One of the main targets of the currency war is to provide the right conditions for the growth of the net exports value, as an element of the country’s GDP. The devaluation of the currency exchange rate reduces the price of export products abroad, allowing displacing competitors’ goods from foreign markets. In this way, the state-aggressor in the CW uses the attraction of foreign funds in the form of payment for export to solve its problems. The conduction of CW can be a serious catalyst for growth of the economy, which began the currency depreciation (Rickards 33). In some way, the idea of CW is very much linked to the concept of classic hot war. Although, there is no military conflict, the ultimate goal in the form of transfer of resources from the loser to the winner, certainly, has a place.
At the same time, like in any other type of warfare, there is a risk of the enemy’s self-defense measures implementation. The opposing side in the currency war may also decide on the devaluation of the national currency, in order to maintain advantageous positions of domestic producers in the country’s market. Such a state of affairs, aligning the positions of the parties to the conflict, can be the basis for international instability. Because the current system of international trade was based on a certain ratio of exchange rates, their abrupt fluctuation in the framework of a currency war could provide the basis for an international crisis. It is usually quite difficult to predict the consequences of such actions with the sufficient precision.
Other tools of the interests’ protection in the CW include the implementation of the protectionism measures. Just as in the case of the devaluation of the national currency, it is quite difficult to identify the possible consequences of such a decision. In this way, the beginning of the CW always brings a certain level of uncertainty and chaos in the global financial system, leading to its destabilization. In a globalized world, such a situation can be devastating not only for the major parties of the conflict, but for all civilized countries. Rickards claimed that the results of CW negatively affect all the parties of the conflict, even the winning parties (34). The law of unintended consequences that accompanies any major conflict can seriously damage the modern economic system. Even if the state-aggressor in the CW reaches its goals in winning lucrative positions in the foreign markets, a gradual decline in purchasing power of the losing country due to the reducing production volumes and rising unemployment could cause the negative results and create the conditions for economic and socio-political instability in the world. In such conditions, it is difficult to predict how disastrous the consequences will be and whether they will be repaid at the expense of the profits obtained during the CW.
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The Connection between Currency War and War Conflicts in the Twentieth Century
The practice of the CW performance in the twentieth century allows mentioning about a direct link between this type of conflict, and a hot war. Most often, the currency war created as the precondition or was a consequence of the conflict states in its classical definition. The example of Weimar Republic’s hyperinflation showed how the significant devaluation of the national currency could lead to the rapid development of the state (Rickards 46). Though the majority of the German nation has faced the catastrophic life conditions in the period of 1921-1924, the hyperinflation served as a catalyst for the national production level growth, due to the significant accumulation of capital in the hands of industrialists at times of a crisis. Using the CW tools, Germany has managed to reach its political goal of restoration of the state in the face of international aggression and the policy of constraints. The fact of CW itself created conditions for the Hitler’s coming to power, which was carried on the shoulders of industrialists that got stronger during the crisis. As it can be seen, the CW has served as a premise for the occurrence of the World War Two.
Another example shows how the CW can become the consequence and a logical continuation of a hot conflict. During its Vietnam Campaign, the United States had faced the rapid growth of the military expenses. The Johnson’s policy of “guns and butter” has greatly contributed to the growth of social expenses of the state, which in sum placed a heavy burden on the state’s budget. To guarantee the fulfillment of its obligations, the United States had to run the printing press and weaken the control of inflation. The inflation had been overcome and brought under control only in 1986 (Rickards 57). Since the U.S. dollar was the leading reserve currency, such a situation has caused damage to the Bretton-Woods system and led to its collapse in 1971. So, the CW was a logical result of the unsuccessful hot war campaign and, eventually, led to the collapse of the international monetary system.
The Currency War as a Method of the Political Terror
Another aspect of the currency wars that requires consideration is the possibility of their usage as a tool of political terror. In this case, the country-aggressor uses its unique position in the international monetary system to force another state to play by his rules. The victim is usually seriously tied to the aggressor’s currency and forced to search for the compromise and make concessions. At the same time, the specific of the modern globalized world does not allow to concentrate the effect of the CW on the separate victim. The consequences of the currency manipulations often felt far beyond the intended area of influence of the crisis.
The example of such a political influence, provided by the methods of the CW, is the U.S. rebalancing policy of 2010 (Rickards 86). Trying to create the conditions for the growth of its net exports, the United States has faced the requirement to find the perfect market for its goods. The Chinese market had been chosen for the consumption of the American products. The effective depreciation of the dollar was required to capture a large share of China’s domestic market. In such conditions, the United States has decided to implement the quantitative easing (QE) policy to reduce the value of the dollar. It should be mentioned that the QE method is widely used in the modern history of the U.S. monetary system. At the same time, the controversies about the effectiveness of the QE’s application have already reached political circles and cast doubt on the usefulness of such measures for the country and the world’s economy, as a whole (Krugman 112). The rapid flow of newly printed dollars has led to an increase in inflation in China, which could be one of the objectives of the ongoing currency war. The issue was that the inflation tendency has started to spread as a form of financial plague to other developing countries. The dollar flow has led to the growth in inflation of “South Korea, Brazil, Indonesia, Thailand, Vietnam and elsewhere” (Rickards 90). The idea that the economic crisis in the 21st century most usually extends from the center of the world economy was supported by Niall Ferguson (283).
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The question is why we should call such a state of affairs a terror. The problem is that for most of the developed countries the issue of inflation is not such a destructive value until it reaches the alarming proportions. But for the developing countries, which have failed to build a welfare state with a high level of social security for its citizens, the growth of prices for food and energy can become a serious problem. Rickards thinks that the CW of the United States against China has become one of the reasons of social and political crisis that occurred in the Middle East in 2011 and continues up to this day (91). The Arab Spring Revolution that has swept through North Africa and the Middle East was a result of the rising food and fuel prices. In this way, the political and financial influence of the American state in the world became a reason of social and political crisis in large part of the modern world. The destructive consequences that are described to the viewer from the TV screen make it possible to define the perspectives of the currency war actions.
Globalization as a Factor of Currency Wars and Its Future Potential
To completely understand the phenomenon of the CW in its modern state, it is necessary to consider all of its possible forms. In particular, it is important to understand the role of globalization and transnational corporations in this process. The globalization does not only create conditions for the spread of the negative effects in the global economy, but it also serves for the emergence of a completely new player on the world’s market, which can also be a tool of the CW. The transnational corporations that have a possibility of free moving and operating of the production’ factors, give the states more opportunities in performing pressure on competitors. Rickards considers the example of gas wars that took place in 2009 between Russia and Ukraine. This example clearly shows how the corporations can be used in the modern conflicts of the states. Here, the aggressor is not required to provide currency adjustment to acquire the goal. The simple manipulation on the limitations of a competitor in the key resources makes it possible to achieve the advantages in negotiations and to impose the conditions.
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The variety of examples of the currency war conduct in the modern history allows mentioning about the effectiveness of this tool in achieving the goals of the aggressor countries. However, the level of the negative consequences of the implementation of such scenarios can often be more significant than even the results of the classic hot war. The ability to quickly and effectively spread the virus to the economic crisis abroad, creating obstacles to a large number of states, is a major threat to international stability. Despite the fact that there is an international monetary fund (IMF) that is designed to ensure stability of international finance, the largest economies in the world easily ignore its demands to achieve their goals. Such a state of affairs does not contribute to international political stability and creates new threats for the modern world.