Currency wars ?

As per a recent article in the leading news paper, “Global imbalance” is the cause for economic crisis. The US is running huge trade deficits whereas country such as China due to its vast exports across the globe had generated trade surplus. The surplus money had found its way into US and since the interest rate was low, it inflated the real estate prices, shares and asset and finally the bubble burst. This rather, I would say as one dimension of economic problem. How was China able to achieve this surplus? Is it because China being technologically superior compared to other nation like US?
 

I believe one of the root causes of the problem is the currency exchange rate. There are accusations that China is undervaluing its currency to increase its export and remain competitive, on other hand US Dollars, Euro and Japanese Yen are strong compared to Chinese and Indian currencies, but unfortunately the job losses seems to be maximum at in the countries where currencies are stronger. Also, the economy is still in bad shape in developed countries. Ideally, if a country’s economy is in bad shape, then, I believe the currency exchange rate should depreciate. This, I believe is logical, any kind of asset like real estate, share market takes a beating when a country faces economic crisis. If the currency is strong, this is bound the multiply the problem, as import will look cheap compared to domestic production.

 

At same time, can US think about depreciating its USD against other world currencies? May be not, since USD is considered as Global reserve currency in the world, the moment there are indication that US would devalue its currency, it might result in a catastrophe, particularly with most of the countries across the world still holding USD as their foreign exchange reserve, they might end up selling USD for other safer investments. Euro and Yen is also considered as foreign reserve currency though at a distant second. This is one of the reasons, as why developed countries might not be in position to depreciate its currencies.Why does import look attractive when currency is strong?With 1$, one could get much higher value commodity/service in countries like India , China compared to what the money can buy in US, UK or Japan, naturally any business man would like a source his goods or service from that part of the world. Even in one’s house, if one look around you would only see international brand electronic products, hence with world becoming flat and small , due to faster information exchange , easier air travel , GATT/WTO agreements any commodity particularly consumer electronics, which has price tag above $100 and less than 10 kgs in weight (call it 100/10 rule? – had earlier written in my blog on similar lines) has to mass produced and entire world is the market and if the manufacturer concentrate a particular region, then the manufacturer could become extinct or acquired due to competition. Hence, product manufacturer has to optimize all categories of cost; this would naturally lead to locating manufacturing plants and jobs in low cost countries.

In my opinion, when there are job losses and the economy is showing shunted growth, and if the country currency is strong it might end up in creating multiple problems.

[The article has been contributed by M.Guha Rajan. He is a software management professional as well as a PMP certified Project Manager. He is post graduate in management and holds a degree in computer engineering with over 15 years of post degree work experience. ]

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Currency wars ?

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