How I Learned to Stop Worrying and Love Currency Wars

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Exchange rates are boring, but last week Brazilian Finance Minister Guido Mantega came up with the colorful turn of phrase “currency wars” to describe a situation in which a bunch of different countries try to devalue simultaneously. Ever since then the international business press has been full of stories about currency wars. Timothy Geithner even went so far as to explicitly deny that there would be any currency wars, and today the Financial Times got IMF Chief Dominique Straus-Kahn to warn darkly of the perils of currency wars:

“There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” Mr Strauss-Kahn told the Financial Times on Monday.

“Translated into action, such an idea would represent a very serious risk to the global recovery . . . Any such approach would have a negative and very damaging longer-run impact.”

This seems completely insane to me. I’m mildly optimistic that currency war would be broadly beneficial. But the alternative to the “beneficial” scenario is Paul Krugman’s theory that currency war will do absolutely nothing. That’s not much of a worst-case scenario. A currency war, after all, isn’t an actual war. Nobody gets hurt. It’s just a striking term. If I called it “global uncoordinated quantitative monetary easing” people’s eyes would just glaze over.

Meanwhile, look at the very next paragraph in the FT’s story:

The yen dropped against the dollar on Tuesday after the BoJ announced its decision. Government bonds, stocks and gold prices all rose on the expectation that central banks of the world’s biggest economies would embark on a round of quantitative easing.

There’s much more to the economy than the stock market, but that stuff is all a good sign. Currency war is, in my view, a pointlessly complicated and not particularly effective means of reviving the global economy. But at the margin it’s helping, not hurting.