The prospect of a currency war is overshadowing that of a trade war. The bad news is, I believe, they are both coming. Two kinds of blames are being thrown between the world's major economies. One is America, Germany, Japan blaming China for keeping Yuan artificially low. The other is China, Germany, Russia blaming America for printing too much money. I think they both duely deserve it. The bad news is, there are not much people can do about it. And this, I believe, is a result of lack of a global monetary authority.
Ever since the end of gold standard, governments have been printing money badly. I guess you can say a currency war had been going on for a while and it's just getting more attention in a bad situation. Why people want to do things bad for them. Well, while most economists agree too much liquidity is bad for the world economy as a whole. They also agree that depreciating currency will bring some recognized advantages, like encouraging exports or easing debt burden. Hence lies the dilemma, what's good for each country is bad for the world. In a situation like this, the natural tendency is for every country to pursue their best interest at others' cost, the Nash equilibrium. In fact, the Nash equilibrium is so often the solution that everybody behaves most selfishly and most shortsightedly, I'm beginning to suspect there is some kind of mathematical fact behind it.
In this post, let's concentrate on American part of the equation.
I'm not a fan of printing money to shore up the economy in the time of a recession. The recession is here for a reason and printing money generally speaking exacerbate those reasons. Not say the debts. Most Americans now, except a few die hard Keynsians, fear the bond market might collapse and 'all the dollars will fall back on us(Paul Volcker)', just like the poor Greek. But Greece is not America. They don't have oversea military bases and navies. They don't have the best universities and R&D labs. They don't have clout in international organizations like IMF. The GDP of Greece is not 1/4 of the world. For short, Greece is not the superpower and their currency is not the reserve currency. America is. Hence there is a chance that America can actually print the way out of this debt hole.
(Warning! The content of the following paragraph of this post is highly dangerous. Do not try it at home! All information provided is provided for the purpose of information only. The author makes no gurantees of any kind.)
When a person is head over heel in debt, he usually has only two choices. He can declare bankruptcy or he can start working hard to save money to pay off the debt. That's when he doesn't have a money printing machine. In the current situation, it would only be foolish if America don't print as much money as can get aways with. Surely, it's bad for the world esp for the creditor countries, but what the hell, America is in a strange situation right now. What's bad for the world is good for America and what's good for the world is bad for America. If the prospect of the world is bad, investers will flock to the treasury bond which is the only safe haven in a sinking world economy. Even if they know the dollar is also sinking, they can at least have the comfort of having each other. And this is the most important factor to keep bond interest rates low. If the world thaw, Euro will go up, commodities will go up, stock will go up. Investors will leave bond and the bond interest rate will rise. Luckily, or unluckily, this is not gonna happen any time soon.
A more practical problem, right now for America, is not if printing money is good but printing how much and how to spend it. Well, I'm not finished yet, but the time is up. See you next time!
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