One more such victory - The Economist.doc

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ACADEMIA DE STUDII ECONOMICE BUCURE TI

Who wants to win the currency war?A study on the article One more such victory from The economist

Anul 2011

Facultatea de Finan e, Asigurri, Bnci i Burse de Valori


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One more such victory

The emerging economies are winning the currency war. No one is celebrating

The article we are commenting on today appeared in the online edition of The Economist

on October, 1st and is called One more such victory. It brings out the situation of some

emerging economies that seem to be winning the so-called currencies war in the context of

the global economic crisis. We learn about the central banks efforts to slow their currencies

fall, because even though these tumbling exchange rates might be considered a victory, it

comes at such high costs, that nobody is celebrating. The article also mentions importantaspects of some emerging economies, such as Brazil, China, Korea, Poland, Thailand etc., the

situation of Greece, the stagnation of the American economy and the slow pace the European

one converges on. In addition, we find out about international trade, inflation, exchange and

interest rates and the actions that governments take in order to stimulate their countries

economies. However, the author does not forget to mention the consequences that some of

these actions may have on the future development of certain economies. For example, the

central Chinese government may decide that the economy needs a new stimulus, but banks

may not be that willing to get involved; it this happens, the situation will become slightly

different than expected. As it usually happens, no matter how high their success rate is, big

chances are for casualties to exist.

In this article we have identified the following keywords: currency, emerging economy, bank,

interest and exchange rate, government, global spending.

Paragraph 1.

In the beginning, we find out about the Brazilian finance minister, Guido Mantega, who first

mentioned the currency war about a year ago. In my opinion, in the context of the global

crisis, it shouldnt come as a surprise that every country would try to protect its economy in

some way. Mr. Mantega worried about governments trying to weaken their currencies, which

actually happened, because the American dollar fell by 11% against the Brazilian real. Of

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course, this was a big disappointment to the manufacturers in Brazil and it was necessary for

several taxes and restrictions to be imposed in order to overcome the problem. And Brazil was

not the only emerging economy that had to do so.

I consider that we should expect similar occurrences in the future, as every country is mainly

worried about its own economy and chances are that governments take actions that will

influence in a way or another the situation of other economies.

Paragraph 2.

If until now we have dealt with a weakening of the currencies, we observed that the economy

changes constantly. So the invasion of foreign capital wich affected the appreciation of

currencies entered into a shambolic retreat. Why shambolic? Because we have witnessed afall of the exchange rates of almost every emerging economy since the beginning of August.

This fall is caused by the extern outflows. So, it isnt enough to impose taxes and other

restrictions in order to change the situation that the emerging economy was in.

The economists observed this phenomenon and they have tried to coach a currency rise. The

final solution was decided by central banks across the emerging world which intervened to

slow this falling.

All things considered, this currency war dragged all the economy agents in a constant fight togain competitiveness against the others. However, in this case we talk about a Pyrrhic victory

for the winner.

Paragraph 3.

The third paragraph brings an explanation of the term Pyrrhic, used in the previous one to

describe the victories that the tumbling exchange rates may be considered. I believe that the

comparison with the Hellenistic general, Pyrrhus, is very inspired, because these victories

come at such a high cost for the economies, that we almost have no reason to be happy, just

like the subtitle of this article underlines: No one is celebrating.

In addition, the situation of Greek economy itself is brought up, because, as we all know, they

are almost in default and their situation influences other countries too. I believe that the

investors and the banks are right to doubt other governments in the euro-zone, taking into

consideration the way that Greeces economy has managed its finances, loans and

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investments. So, in my opinion, global investors should not be blamed for not wanting to

place their money in emerging economies, as the risks are definitely quite high.

Paragraph 4.

Certainly, currencies can accomplish their attributions if they are correctly valued. Generally,

people choose between money and bonds, and we know that the purpose of each investor is to

gain profit and most of them seek easy ways for it. I consider that few of them are willing to

tolerate any risk in their deal. Because of this very reasons, they prefer to sell assets, from

gold to Thai equities and they only allow cash payments. This way, unpleasant situations are

avoided.

We talk again about tumbling as a result of which the bonds will follow suit. The problem isthat as a consequence of these news, its very possible that foreign investors will puke up

their bondholdings. This way, the emerging economy will suffer because it will lose many

investors from countries such as Indonesia, Korea, Malaysia, Mexico, Poland and Turkey.

Paragraph 5.

In this section, we learn about how the weakening currencies will help emerging economies,

but I think this is not enough, as the global spending still declines. I consider that as long as

the exports are not improving, there is a slim chance that economies will recover any time

soon. The Netherlands Bureau for Economic Policy Analysis informs that exports from Latin

America and Asia are still not satisfactory and I believe that the situation is not going to

improve at a global level, if we take into account the fact that America is in a phase of

stagnation and Europe has a very slow pace, not giving any sign of serious recovery.

Paragraph 6.

Even though they tried a recovery of the emerging economy by cutting prices, the purchasing

power came down, to the repine of economic agents. Mainly, the complaints came from

Chinese manufactures who voiced all these in a preliminary survey, demonstrating that the

production has shrunk . Also, the article mentions the international trade hasnt contributed to

the countrys economic growth. In my opinion, China is one of the great powers and its

economy affects a lot of foreign investors. Considering the imports which are still strong (we

know that China imported 30% more than it bought a year before), this fact seems to be true

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and HSBCs China economist, Qu Hongbin, confirmed it. For example, he believes GDP will

still grow at an annual pace of 8.5-8% in the second half of this year.

Paragraph 7.

Lately, China has imported big quantities of iron ore and other materials used in construction.

This is because the construction industry has developed considerably, being a very important

branch of their economy. However, this has also become a problem for the government,

because they are trying to curb the prices for properties, which has involved a series of actions

oriented towards real-estate developers. On the other hand, the fact that affordable houses are

being built is, in my opinion, a positive aspect because this means that several amounts of

money are going to be invested by people who need a home, so this could be a boost for the

economy, even though the profits are being reported to be lower. I consider that China is one

of the economies that have serious potential of developing and it might even become the

greatest world power in the near or far future, as America does not seem to show a spectacular

economic growth.

Paragraph 8.

Emerging economies have an important role, or at least that is what Michael Buchanan and

his colleagues at Golden Sachs believe. They consider that if the world economy were to

collapse, these emerging economies could be helpful; for example, Asia could offset a growth

shock of up to 5.1 percentage points, only if they allowed their interest and exchange rates to

fall to their lowest points.

Paragraph 9.

In this section we learn about the actions taken by the central banks of Israel and Brazil. They

have started to cut rates, even though the inflation is still above the official targets. I believe

this is a way to stimulate the economy and, hopefully, it will have a beneficial outcome and

the global economy will start to recover.

Moreover, I find it important that the Thai government is taking brave decisions, such as

purchasing generous amounts of rice from the farmers. Specialists believe that this may have

great results, even better than expected in the first place. Stimulating the local producers is a

good strategy and if they manage to export at least a small part of what they produce, their

economy may have a big chance to develop.

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Paragraph 10.

On the other hand, there are some emerging economies that may be more reluctant to

stimulate, because they have done so before and the results were not always the ones

expected.. For example, India is still affected by the inflation that quickly ensued after the

financial crisis. Also, China has had a hard time trying to come to terms with the bad debts

amassed due to the stimulus lending of 2009 and 2010. It is thought that loans worth about

$310 billion 630 billion may have turned sour. This is why I believe that banks may be

reluctant to another stimulus for the economy, in order to protect themselves and make sure

they gain profits.

In conclusion, the article One more such victory presents a very detailed image of the so-

called currency war, pointing the most important aspects of it and giving us an idea about

how the national economies, especially the emerging ones, are in an interdependence with the

global economy.

However, even though countries are aware they influence one another, it happens quite often

that governments and central banks take several decisions that will harm other economies, but

that are absolutely necessary in order for that countrys economy to fight the crisis and

develop. It is important to know that sometimes governments might decide to stimulate the

economy, but their vision is not the same as banks and other investors, which tend to be

more careful with where they place their money. This is because sometimes it happens that

they take back their money only after it has turned sour already and we can not talk about

profit anymore. An example of this situation is China, that we mentioned before, where banks

lost about $310 billion 630 billion after the stimulus lending in 2009 and 2010.

We will have to wait and see what the consequences of this currency war are going to be,

because even the most successful battles leave casualties in their wake.

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