A reverse in the behavior of Central banks of developing economies was reported by International Monetary Fund. Few months ago the central banks of countries like China, Colombia and Chile were selling dollars in an attempt to support their own currency and avoid devaluation. Now they are doing exactly the opposite - selling own currency in an attempt to keep it low and have an export advantage.

Colombian Finance Minister Juan Carlos Echeverry even said the country needs “more ammunition” to drive down the peso in the global “currency war”. At the same time, as Bloomberg reports: "...The Philippines banned foreign funds from deposit accounts and unexpectedly cut interest rates in July as the peso hit a four- year high. In China, authorities lowered the Yuan reference rate to the weakest since November..."

But what exactly so called "currency war" means?

In fact it means one of the most absurd phenomenons of the world of fiat money.

What is money?

Money is a tool for market exchange an evaluation of goods and services. So for money is best to be absolutely stable so the measurement to be precise and exchange honest. So theoretically money is an absolute math mechanism - not influenced by nothing and working automatically. In fact in times when money was gold this worked almost perfectly.

But now money is not gold and there are much different currencies, administered by different central banks and governments. So money has become a toy for playing with and manipulating the economy.

In the world of stable and fixed as value money, the competitive advantage was achieved by better working, reducing costs and developing technologies. And this was the right way to chose.

But now in fiat-money world governments discovered that by devaluing the currency they can achieve a competitive advantage on foreign markets. And much governments started doing this. Now we call it a "currency war". Every government prints money and throws it on market in an attempt to help its own exporters and this way - increase the economic growth. But what is the result of all this?

The result is a market over flooded with money. And almost fixed resource base and real goods and services production. I.e. more and more different fiat-money against the same real production. And as expected - increasing prices of the production, measured in all currencies. Inflation.

When we see 1,50 dollars per Euro we call the Dollar "cheap". When we see 1,25 Dollars per Euro, we call the Dollar "expensive" and the Euro "cheap". But in fact while currencies are moving one against other, this does not measure their real value. The common fact is that resources, goods and services are becoming more expensive, measured in all currencies. I.e. the currency war only devalues all currencies and does not bring competitive advantages.

The cheat with currency devaluation is that this way salaries of workers are cut. People are working for money with less value. This simply means that a government that devalues its currency is robbing its own people. And if this government achieves 5% economic growth at the price of 20% devaluing the currency, this in fact means 15% economic drop. The purpose of economy is to develop and to make people richer. And not to develop only in nominal values and in fact - to make people poorer.

The results of currency war are seen everywhere. Oil price is going up, moving all energy prices with it. Food prices are going up, leading to problems in developed countries, to hunger in Africa and even to revolutions is Arab countries. Gold is going up making all government and central bank's reserves in cash and bonds look funny.

That is what the currency war means. Devaluing money and a race who will be faster in pumping inflation.

Ironically devaluing money does not bring any real advantage even as cost saving mechanism. When all workers in all countries are working for less money, measured as real value, then no one of them brings any advantage. In addition, the rising prices of resources are erasing the benefits from cheaper workforce. Finally - we have expensive resources, poor workers and stagnating consumer spending. I.e. stagflation...

That is what a currency war means - a common madness, leading to a common pain for all belligerents.

Dobri
August 14th 2012