Jim Rickards, the expert on currency wars has stated that Currency Wars 3 has begun. To get an insighton what is a currency war see this Ricakrds video taped last year.
Here is a quick summary of parts of the above video:
- A currency war starts with insufficient growth. When there is slow growth there is a temptation to steal growth from your competitors by devaluing your currency.
- The way it starts is look at a company like Boeiing. Indonesia needs airplanes but it doesn't produce airplanes. So it goes shopping. It looks at the world market. Given the same quality of product, it will buy from the place or country that has a cheaper product. Currency devaluation in America makes the Boeing product cheaper to buy by the Indonesians. If Indonesia buys products from the USA it creates jobs, lowers unemployement, and can pay more taxes for the governement to collect. That is how politicians and governement officials look at currency devaluation.
- The problem is that the US imports more than it exports. The imports will go up because other countries have more dollars and thus make export prices rise. Also, there is retaliation. Other countries will retaliate- almost instantaneoulsy by cheapening their currnency (import inflation), do capital controls, and trade wars (excise taxes, etc). This will reduce world trade.
- Other countries cannot beat the US Militarily. So an alternative is financial warfare.
- If the US messes with the dollar, it could push people out of the dollar and use alternative currencies (such as gold).
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