The US starts an intense currency war to protect its global standing

President Donald J. Trump, attended the Full Honors Ceremony for Secretary of Defense Mark Esper Thursday, July 25, 2019, at the Pentagon in Arlington, Va. (Official White House Photo by Tia Dufour. Public domain)

One month ago this newspaper’s title was: “Trump after marginalizing G20 attacks Europe and China where it hurts, brandishes currency war”. Since then, the American President intensified his attacks on money parities, mainly against China. At the same time, he continues pressing the American central bank, the Fed, for not taking tough measures to actually start a currency war, by devaluing the dollar. Obviously, he considers super tariffs not enough to punish the Chinese exports to the US.

Every first year student of economics knows that a devalued currency can help exports and weigh down imports. However, the same student would have learned that the trade partners of every country can do exactly the same, and thus lead international trade and financial markets to a catastrophic vicious cycle. This was exactly the case in the aftermath of the Great Depression of 1929. The currency devaluations which followed in the 1930s led to the biggest catastrophe the world had ever known.

Currency wars

The Second World War claimed tens of millions of lives. The obliteration of half of the world changed the way humanity behaved. The United Nations and other prestigious conflict solving bodies were created, in order to avoid another global destruction in the future. Unfortunately, the Trump administration in America now tries hard to erase the lessons the WWII cataclysm taught us all. Let’s dig into the present monetary arrangements though.

Unlike any other currency the foreign value of the American dollar is not shaped by the country’s trade flows. During the last thirty years the huge double deficits of the US economy, in foreign trade and government budget, have not been enough to tame the foreign value of the dollar. The American dollar is immune to the US economic deficits because its value is supported by the political and the military might of this country.

So, practically, the US ‘owns’ the oil reserves in the Arabian Peninsula and elsewhere in the world. At the same time, the dollar is indispensable for almost all and every international market and transactions. So, those facts have created a value and demand shield for this currency.

Immunised from deficits

In this way, the American economy has been immunised from the delimitation every other country experiences, with internal deficiencies, persisting trade deficits and large fiscal gaps. As a result, for many years now Washington has been freely using the dollar printing machine to perpetuate its leading political and military position in the world gained after WWII. For this reason it has financed colossal defence expenditures.

On top of that, globalisation allowed the American multinationals, to go abroad and produce cheaply in China and elsewhere and sell lavishly in the US. No need to mind about the trade and government deficits. This was an arrangement wholly shaped by the US and dutifully undersigned by the rest of the world, China and Europe included. However, things seem to start changing now.

The rise of the poor

The once cheap manufacturers of American products have acquired political and economic might of their own and have started questioning the US arbitrariness in global affairs. Obviously, Washington has reacted strongly. Trump expresses this reality in a brutal way, but other presidents before him have done even worse. George W. Bush and his father before him destroyed Iraq when this oil producer started selling oil in currencies other than dollars. The same story is currently repeated in the case of Libya, with general Khalifa Hafta.

The US needs to control the oil reserves in both those countries. The US economy and the dollar cannot survive without controlling most of the global oil reserves. Iran is the next target. There are forces though which oppose this prospect but Washington will do whatever it takes to maintain its unique position.

At what cost?

In short, the trade and now the currency war declared by Trump, primarily against China and secondarily against Europe, is not of a clearly short term economic nature. It is more of a long term geopolitical endeavour, to tell the Chinese and of course the Europeans, they cannot change the American arrangement. The US must continue being the global ‘law’, more like the earth’s sheriff.

The question though that remains is how far Washington is prepared to go in order to maintain its global position?

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