Currency War Marks Beginning of Shift from Washington Consensus to Beijing Consensus

By Saliem Fakir · 25 Oct 2010

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Picture credit: Cain and Todd Benson
Picture credit: Cain and Todd Benson

We sit amongst the vulnerable beneath the trampling of elephants as they fight it out. South Africa may be a big player in Africa, but is no match for the economic giants in the global arena. South Africa simply does not have the foreign currency reserves or trade power to fight a currency war.

All South Africa can do is watch and hope for the best while attempting to stem the assault on the Rand to some degree -- but it won’t be enough.

The currency war on everyone's lips marks a new front in geopolitical tussles between old and new powers.

Emerging powers are slowly subverting the hierarchy of wealth in favour of themselves. This is really at the heart of matters, as they stand.

While the world is interdependent it is not without rivalry. It would not be farfetched to suggest we are in the throes of a more nuanced geopolitical struggle, and we have not seen the end of it yet.

Moreover, when the currency war ends, once can’t be too that sure there won’t be other wars. We are also due for a trade war very soon, if it isn’t already happening.

The currency war was inevitable. China’s surpluses are too large in addition to a competitive currency that favours the purchase of its goods. The United States of America (US) has a large and unsustainable debt and deficit. Its economy is sluggish and can’t absorb the growing jobless numbers.

The United Kingdom (UK) has an enormous budget deficit and will be shedding close to half a million jobs from the public service alone.

Things are not looking pretty for the old powers. Europe sits with a problem too. Germany just about manages to keep its economy going despite the strong Euro, but the rest of Europe sits in anguish about their collective future.

Much of the next decade’s growth will be led by Asia. China is positioning itself to be the leader of the pack having just overtaken Japan as the second biggest economy in the world. And, gauging from its recent spat with Japan, China is already asserting itself.

The currency war also marks a seismic shift, i.e., starting to move away from the dollar as the reserve currency towards other key currencies gaining ascendency. There is just too much at risk in pegging everything to the dollar.

Diversification away from the dollar is going to be a necessity as the world doesn’t want to face the same liability that they just experienced due the US’ mismanagement of its own economy.

Part of the currency war entails the US government first getting American taxpayers to ‘socialise’ corporate extravagance and now trying to get other governments and taxpayers to socialise American debt and trade deficits.

But America’s currency war also follows its oil wars, which burnt a huge hole in American wallets. Joseph Stiglitz estimated the war liability for the American economy to be in the region of US$3 trillion. Add a few more trillion as a result of the financial crisis and clear picture emerges of just how deep this debt hole really is.

This is not the end of it either. More is to come given recent disclosures of toxic mortgage debt that also need to be dealt with.

Worse still, one crisis only perpetuates another.

The American economy needed to be rescued. The American government could only do so by printing more money, bailing out financial institutions and keeping interest rates low.

But low interest rates in the US and Europe only stirs the torrent of doled out cash seeking other prosperous shores.

It at once points to where new growth is taking place – clearly the emerging economies – and in the same breath, says a lot about investor confidence in the US, Europe and UK.

Hence, the flood of Euros and Dollars streaming towards emerging economies where interest rates are higher. Simply put, there are better things to do with cash than investing it in deflated economies.

It is also one of the reasons why lowering interest rates won’t stem the flow of cash towards these countries. There is just too much spare capacity for growth.

This only helps to push up emerging economies’ currencies and they in turn seek to resist the depreciation of their own currencies. 

So, there you have it: a currency war emerges.

One part of the world has overspent and lived on over-consumption. The other part of the world benefited from this overspending and overconsumption and is neither willing to over-spend nor to over-consume. It is utterly a lose-lose situation.

The last time the Americans enviously eyed their rivals was in the 1980s when German and Japanese exports grew at a phenomenal rate. Back then, the American currency was strong and their goods and manufacturers were losing markets.

Then too, they rebalanced things; but it was the US looking for a free ride. It was the basis of the Plaza Accord in 1985 in which, mainly Japan, was forced to revalue its currency -- meaning appreciate it while the US could depreciate its own and trim down the amount it could owe to Japan in the form of interest on Treasury bonds as well as exploit the currency devaluation to increase its exports.

The consequence was one of the most rapid appreciations of a currency in history and the Japanese economy suffering stagnation for 20 years. China has no intention of going the Japanese route.

The US could do this because it had political clout and the Dollar was the dominant reserve currency. Japan had to oblige because if it did not, the US would have imposed restrictions on its goods.  China faces the same prospect Japan faced given the nationalistic posturing coming from the American Congress, including Democrats and Republicans.

The current rebalancing sits in deadlock. Everybody is loath to have an appreciated currency. Everybody seeks export-led growth to stimulate their economies.

China, in particular, will resist devaluing its current account surpluses and is at the same time battling to get its thrifty populace to increase their domestic spending. So it can’t simply just delink its export led economy in favour of domestic reliance for growth.

America’s biggest challenge is stemming uncontrollable internal degradation, which has been given greater impetus by its loss of external strength due to the collective geo-political power of the emerging economies.

These powers collectively see a new horizon in the making. There could be no better strategic opportunity then now. And, so it is that one must also understand the currency war within the broader context of the rebalancing of geopolitical power that is happening right before our eyes.

Trade and financial rebalancing will have to happen. It will involve China having to make some concessions, but not without it being paranoid about falling into the same trap as Japan did following the Plaza Accord.

China will also be loath to let America win this currency war after all these years in which the US has subjugated its economy to various moral hazards from oil wars to financial deregulation. In so doing, China will not let America get away with a free ride by making the rest of the world, once again, pay for its excesses.

Rebalancing is inevitable as nobody wins. But be sure that trade and currency rebalancing will not happen without the rebalancing of geopolitical power and influence.

All of this will play itself out at the next G20 meeting and where the old powers will be forced to give up some of their own political power and influence for the greater role of the new. This is when the Beijing Consensus, as it has been coined, will truly begin to replace the Washington Consensus once and for all.

Fakir is an independent writer based in Cape Town.

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Comments

Colette Kemp
26 Oct

Currency War

Thank you, Saliem for a very informative article on a fascinating power struggle that the future of world politics will be forged on!

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Richard Henson
29 Oct

Currency War

Fascinating and insightful article. At last I understand (a little bit!) as to why the relative strength of one country's currency to others is so critical, and hence the power struggles this can give rise to. Thank you!

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