If any one who is following the Exchange Market
news closely then those people would have come across this term “Currency
War”. Many news targets on China while US, Japan, UK themselves are also
involved in the war silently. I would like to put few links here which
talks about the present currency wars:
Now
back to the topic. Here I am going to start with the basics and then going to
give some historical facts
What
is currency War?
The
Currency war is nothing but Competitive Devaluation. The
Competitive devaluation is a situation in International Affairs where countries
compete with each other in order to achieve relatively low exchange rate for
their currency.
Who
Coined the Term Currency War?
The
term “Currency Wars” was coined by Brazils Finance Minister Guido Mantega in
2010 in order to describe how Federal Reserve’s Quantitative easing was pushing
up other countries currencies. He also pointed out the effort made by the
United States and China to keep their currencies at the lowest value.
What
is devaluation? What is the difference between devaluation and Depreciation?
When
a government or its central bank deliberately make downward adjustments to its
currency in foreign exchange market then it is known as devaluation. This
largely happens in fixed exchange rate regime. Depreciation occurs when a
currency loses its value due to market forces.
Why
one should care or worry about devaluation (or Currency War)
The
Currency War will lead to instability. Nations who succeed in devaluation often
experience inflation, especially, when they are dependent on imports. While
those nations which do not involve in currency war will experience higher
unemployment since their export sectors will lose competitiveness (read above
article no. 5 for more info).
Some
Historical facts
When
one look at the history then the popular method of devaluation was reducing the
intrinsic value of precious metals content in minted coinage; example the Roman
Empire faced constant threats from barbarians, but they lacked finance to
defend themselves, so successive emperors reduced the silver and copper
contents in coins.
When
Fiat Money came into existence (where the value is purely based on laws rather
than intrinsic value of the content) government started simply print bank notes
in large quantities. After the First World War Wiemar Germany went to
print huge volumes of German Mark in order to cover its expenses which resulted
to hyperinflation on a massive scale.
This
is a small note on Currency Wars which may lead to serious economic crisis
across the globe.
