BBC BLOGS - Stephanomics
« Previous | Main | Next »

Threat of a global currency war

Stephanie Flanders | 08:07 UK time, Wednesday, 13 October 2010

It may not really be a currency war, but even I was surprised by the aggressive language being used by senior American and Chinese officials in Washington last week. Not to mention the head of the IMF. It's been a long time since economic relations between the major powers have been this bad-tempered.

I reported from the "frontline" last Thursday, but here's an "idiot's guide" to the debate over global currencies, which I've just done for the World Service.

Coming out of the financial crisis, every country wants to grow as fast it can. That's not the problem. The problem is how.

The United States and Britain have the largest budget deficits in the G20 - which means they're looking at years of cuts. They're looking for exports to pick up the slack, and the best way to boost exports is through a weaker currency.

The problem is that the eurozone wants the same thing. So does Japan. And so does China - even though America and the eurozone think it's time that the Chinese consumer stepped up to the plate.

It sounds like a global price war, with each country fighting to under-bid the other. But when companies have price wars - don't we consumers usually win?

The trouble is that exchange rates aren't the same as prices - if the dollar is going down, then other currencies have to go up. And governments aren't companies: if they don't like where their currency is going they can intervene. The rest of the world is left fighting the price war on its own.

That is exactly what China and other Asian exporting countries have been doing for the last few years - they've spent hundreds of billions of dollars fixing the market to keep their exports cheap. More than a trillion, in the case of China, which now sits on a mountain of dollar reserves.

At the start of the summer, China promised to let its exchange rate go up - but since then it has strengthened against the dollar by just 2%. The yuan has fallen about 10% against the euro and the yen. You can see why the US and other governments gathered in Washington last week were less than thrilled.

China says the focus on the exchange rate misses the point - policy-makers should focus on the why the US saves too little as a nation, and Asian economies save too much. Long term, that IS what re-balancing the global economy must be about.

But, as the director of the International Monetary Fund said last week, you can't go many steps along that road without a substantial change in exchange rates.

That's why you should worry about where talk of currency wars will lead. Because if the world's leaders cannot agree on the role that currencies will play in this global economy - they're not going to agree on very much else.


  • Comment number 1.

    Let them worry themselves to death over exports and the deficit.
    We need to maintain output and aim for full employment.
    That requires a fiscal stimulus now.
    If they do this most of their nightmares will go away but they are too dumb to see it.

  • Comment number 2.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 3.


    Sorry to be a bit harsh, but this blog is way behind the curve.

    Everything is unfolding as predicted, just not predicted by you or any other 'economics expert'.

    We can't all be net exporters - someone has to buy (i.e.lose), hence the protectionist policies creeping in. How long before we see import tarriffs?

    Currency wars - trade wars - commodity wars - military war - end game!

    And this time all the players have a 'red button'.

  • Comment number 4.

    The problem with a fiscal stimulus is that it only seems possible now through more quantitative easing. If you do that, the currency will drop because the previous QE seems to have already soaked up all of the money black hole that the banks made.

    The currency goes down, other nations (except Germany) think "...Their currency's gone down - they're trying to get a competitive advantage - we've got to try and get ours down...", and so on.

    Ever since the great bank debacle, all of this macroeconomic thinking seems to be artificial. Like the market cannot find its own way. It's understandable, of course but given the fate of command economies in the past, you've got to wonder where it will lead us.

  • Comment number 5.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 6.

    If we in the UK are going to cheapen our exports(whatever they might be!) by depreciating our currency won't that help raise our inflation rate far beyond the BoE target. Or is that was has already been happening?

  • Comment number 7.

    The problem that the West has is that forever chasing lower production costs they fuel China's economy to the detriment of UK, US and European manufacturing. Costs are begiining to rise in China but not sufficiently fast to bring production back to the West. Furthermore, all the R & D going into improved manufacturing machinery is providing better machinery for China and the Far East,who use Western technology, and not the West. In due course this will all end but this is some way away and until then we enjoy cheaper goods but pay with lost jobs and a lost manufacturing base.
    It is counterproductive to impose import restrictions and other control measures but if a product is made in China I am inclined to seek an alternative - not easy but it can be done in some sectors. I also feel that on all internet sold items the country of manufacture should be shown so that the consumer has some, albeit, small choice.

  • Comment number 8.

    4. At 09:14am on 13 Oct 2010, Clive Hill wrote:
    The problem with a fiscal stimulus is that it only seems possible now through more quantitative easing

    I suggest you look up what a fiscal stimulus is.

    As to QE It is just an exchange of one financial asset for another, bonds for cash. How is that supposed to help anything?

  • Comment number 9.

    I really do not know why economists did not understand that during times of global economic collapse that currency wars will occur - there have been numerous example throughout economic history - this is yet again another reason to condemn economists and the poverty of their education.

    The very idea that we should want to condemn others for doing exactly what we have been doing ourselves shows up the collapse of rationality in economics. It is OK for us to manipulate our exchange rate to benefit British Exporters but not OK for others to do likewise!!! The economists who wrote this garbage using such terminology as a 'global currency war' need to be sacked as they don't understand economics.

  • Comment number 10.

    These leaders are not going to be able to agree when half the USA is led by right-wing religious nationalists who plan to default on national debt, print money to fund their way out of private debt, and impose tariffs on Chinese imports. The USA in its ignorance and tendency towards gross mismanagement does not allow any possibility of agreement.

    The only realistic outcome of this GFC is ultimately the abandonment of the USD as the main reserve currency. This will happen either by agreement, and relatively painlessly, or by natural evolution and with great suffering all round.

  • Comment number 11.

    MetalGasket: Don't you get it. All our output in the past has been fake. We borrow 10 to produce 1. This is how you end up with huge debt and deficits.

    We're the similar to the US but without as many toxic loans. Our economic growth principal is the same though. Houses became cash machines that fuelled the economy. This turned them into leveraged assets once the prices slipped. Of course they didn't want the prices to slip and still don't. Unfortunately 5% gains in house prices per year for ever more is not possible, as no one would ever be able to buy a house!

    GDP Growth is a flawed metric. You'd never run your company with such an equation. Look at the debt growth in the past 20 years along with GDP and then look back over the past 100. The past 20 years have been fake growth.

  • Comment number 12.

    i am no economist but surely another massive problem we face is beween 2011 and 2014 the banks that were bailed out during the credit crisis have to pay back the enormous sum of 300bn to the treasury, in other words our taxpayers money, in doing so that is crippling any chance of businesses getting loans,ie. growth , which is the only way we are going to get out of this mess, as cost cutting only takes you so far, where does economic clout come from if not from actually making something? just look at china !

  • Comment number 13.

    JFH presents some sense (as do many others above). However, currency wars are a symptom of the malaise that effects all of the world's economies and not the cause of it.

    It is not difficult to see that the Western economies have engaged upon an orgy of self-mutilation in the name of cost cutting. Neither is it difficult to see the danger of the perhaps too rapid growth of industrialisation in the BRIC economies (and throughout most of the Asian economies). Currency wars are a mere reflection of the tensions caused by these physical and psychological imbalances.

    Unfortunately, the financial markets appear to have won the war against the political, social and 'real' economic entities - just as Buffett predicted. Even more unfortunately nobody appears to be even contemplating addresing the issue. The pain of these wars, as they intensify, will be immense yet our leaders can only offer even more blood-letting and a couple of paracetamol.

  • Comment number 14.

    All this heated talk smacks of desperation - mostly on the part of the US (and us). We want our people to stop buying cheap Chinese goods and we want the Chinese to buy our exensive ones - so we devalue our currency in order to stoke up import inflation and to reduce the relative price of production.

    It doesn't look like a success strategy so much as an admission that they cannot succeed.

  • Comment number 15.

    The Chinese have played a blinder and hold all the cards . It just shows the danger of debt and the far reaching consequences of borrowing from a communist sovereign fund, who's interest's are 180 degrees opposite to the west. How many western governments could hold average salaries down to a $1 a day,it is simply state run slavery...

    There is only one answer and that is balance the books in every sense of the word from trade deficit through to fiscal expenditure. In the case of the USA , they are such a financial basket case they need a root and branch review of ALL their expenditure, especially energy consumption. It is probably one of the few countries in the world who could be truly self sufficient.

  • Comment number 16.

    11. At 09:56am on 13 Oct 2010, dj_gandy wrote:
    MetalGasket: Don't you get it. All our output in the past has been fake. We borrow 10 to produce 1. This is how you end up with huge debt and deficits.

    I do get it dj. You have just been sucked into this mass hysteria about the deficit and public debt. It's complete rubbish.

    An elected govt should have full employment as its main policy target and needs to spend to fill any output gap which we quite clearly have.

    It should employ economists and central bankers who know what they are doing. The dollar came off the Gold Standard in 1971. We have floating exchange rates. Do you have any idea what that means for the concept of a sovereign government having to borrow to finance deficit spending.
    No you don't, thats fair enough but the economists advising those idiots in the treasury should and so should Stephanie.

  • Comment number 17.

    In the regulated economies v. the unregulated ones I know which I will be putting my rapidly devaluing money on.
    The West will need to manage their economies properly and directly and not rely on hopeless variants of monetary economics and the theory of international trade. Intervening in the process of trading between countries should not be seen as heresy - major corporations do it all the time without the text books open. We need to adopt a managed approach between the major players through trade agreements not unlike the Chinese do with African countries. It is only the religion of free markets and the dogma of monetarism that disables the West from doing business with those powerful enough to ignore the club's rules.

  • Comment number 18.

    MetalGasket wrote:
    "As to QE it is just an exchange of one financial asset for another, bonds for cash. How is that supposed to help anything?"

    The aim of quantitative easing is to increase liquidity within the banking sector in order to further increase bank lending and thus investment within the economy.

    There is arguably a growing argument for further use of quantitative easing within the U.K; Adam Posen of the MPC is the latest high profile economist to support such measures. It's also now looking likely that the FED will soon revisit the policy of QE.

    As long as banks do more than just sitting on the extra liquidity that is injected by the central bank, QE can undoubtedly prove to be a useful macroeconomic tool.

  • Comment number 19.

    #8 MetalGasket

    I suggest you look up what a fiscal stimulus is

    Argumentum ad hominem. The refuge of the failed idea.

  • Comment number 20.


    Spot on.

    I assume the exponential function is omitted when studying economics?

  • Comment number 21.

    Metal Gasket

    You seem to like spreading around accusations of dumbness! Sadly, the open-ended deficit spending splurge you advocate is both financially illiterate and immoral! You're stealing from your children again!

    Sooner or later the Chinese will have to let their currency float freely! Their argument that Western nations should save more is ridiculous because, if we saved more we wouldn't be buying all those Chinese goods that we don't really need!

  • Comment number 22.

    18. At 10:45am on 13 Oct 2010, Luke wrote:
    As long as banks do more than just sitting on the extra liquidity that is injected by the central bank, QE can undoubtedly prove to be a useful macroeconomic tool.

    The liquidity is with the original bondholders who now have cash instead of a bond on which they earn interest. I put it to you that they are just as likely to buy another gilt with it.

    Where do you think the last £200 billion went. Well I'll tell you where it is now, its back in the gilts because they know our Govt is gonna buy up another £200 billion at whatever price because it just wants to get the cash out there. This will make the bondholders a guaranteed profit.

    If you think that's a useful tool I respectfully disagree.

  • Comment number 23.

    has anyone taken note of the FTS Index. It's supposed to go DOWN when the economy is declining . YET the

    numbers keep going UP.Do you think that like vultures admiring the currency war about to start ,The stock

    market await the PURR of printing presses injecting vast amounts of capital injected into western systems.

    The affect will be bloat the value of shares (at a cost to everyone else).THE GOOD TIMES ARE BACK.( FOR SOME)

  • Comment number 24.

    19. At 11:00am on 13 Oct 2010, Clive Hill wrote:
    Argumentum ad hominem. The refuge of the failed idea.

    Quite happy to carry on discussing it of you like Clive or do you think that sentence has won the argument ?

  • Comment number 25.

    #16 MetalGasket and #17 watriler
    To spend money, the government has either to borrow it; print it or raise it through taxation. The Labour government of sixties and seventies Britain tried the taxation route. The top rate of tax was first 75% then 93%. It did not work, they finished up going to the IMF for a loan in 1976.

    In between, the Tory government of Edward Heath tried 'printing the difference'. That didn't work either.

    So where exactly are you suggesting the money comes from to maintain full employment and deploy a 'fiscal stimulus' ?

    ...and do you really want a 'trade war' ? Did we suddenly become a self-sustaining economy ? Or do you want it at the EU level, as the french ? Do you think the World economy will improve from it ?

    That's also been tried. I recall reading that japanese electrical goods imported into France at one time (in the seventies, I think) Had to go through one lightly manned customs post in central France - i.e. away from any ports or airports. It was legal, are you suggesting we do that ? Do you think other governments cannot do the same kind of thing ?

  • Comment number 26.


    It is not just bonds for cash, but 'new' cash - created from thin air.

    In essence - printing money!

    Its purpose is not just to improve liquidity - existing cash does this.

    -its real purpose is to ramp up inflation and lower the currency.

  • Comment number 27.

    Individual politicians are often very clever, but on mass they rapidly descend into mass dilusion.

    It is stating the blindingly obvious (we need to do this to politicians) that not every country can weaken their currency at the same time - basically every currency would end up back where they started from.

    It is also stating the blindingly obvious that not everyone can be net exporters but that does not mean that importers are "losers". The strictly accurate statement is that not everyone can be net exporters at the same time. So for example the UK was a net exporter for many decades (possibly centuries) from the start of the 19th Century (maybe earlier) but as wealth increased we became a net importer. The point is that as a general rule developing countries get to a point where they become net exporters and it is only later, often much later, that the wealth gets spread around sufficiently in their economies for domestic demand to expand sufficiently for those countries to become significant importers.

    In the world economy the problem is that many significant currencies are not floating freely. In a fully floating world much of the tensions would be eased.

    The difficulties we face are substantially derived from the fact we are in the middle of an unprecedented economic period. No I am not referring to the banking crisis. The is the first time for possibly 500 years that there is a massive economic power shift, in this case due to BRIC countries rising

  • Comment number 28.

    The west is wedded to the idea of free markets, so they allow a free market in their currencies. Except that it is not really free because they intervene, notably by offering foreign investors better interest rates on government bonds than they can get elsewhere, in order to generate an inflow of foreign currency to prop up their exchange rates when considered necessary.

    We have seen the disaster that market driven credit generation can produce and now face a repeat of the problems caused by the currency market in the 1930s.

    Is it not time to admit openly that not all free markets operate in a way which is for the public good? It would be beneficial for world trade if governments were to order their central banks to operate openly in the wholesale currency market, using swap arrangements to keep rates at completely predictable levels. These levels being determined by an agreed algorithm designed to reduce net payment flows to near zero in the medium to long term.

    Such a system could be set up initially only between currency zones willing to collaborate. Call it a currency union if you like. Others might then join when they saw the advantages enjoyed by members.

    It would mean a drop in the profits made by speculating in derivatives based on exchange rates, or in the currency futures market to give them their traditional name. The insurance that these derivatives provide would no longer be required.

    The City of London is the world center for this particular form of highway robbery. So I do not expect that the UK government, run by parties which receive a great deal of funding from the City, to be very enthusiastic about making changes.

    Like many things wrong in the UK, rationally based measures to eliminate them must await reform of the UK's political system, particularly its funding.

  • Comment number 29.

    Oh right, so when everyone was cackling that the pound surging away from parity with the Euro was a GOOD thing, and signalled a death knell for the Euro, they were just joking. Now I notice the pound weakening that's ALSO a good thing, and smart thinking by the decision makers to boost exports. And what do potential creditors think of the idea that their credit can have 20% wiped off its value because the government want to boost exports/inflate away debt?

    The problem is a little more fundamental than currency - even if we ignore that not everyone can be an exporter. The British don't have raw wealth in the ground and do not add enough value to the raw materials imported to justify the money they suck from the balance of trade. You can use the exchange rate to squeeze a few more drops out of the charge to importers for that GB-value-add but compared to a) adding real value or b) not draining more value than you produce, it's small beer.

  • Comment number 30.

    The rampant greed of the west (bankers, governments and consumers alike) has been our undoing. We have mountains of debt and until this debt is firmly reduced and we are more in balance with Asian economies, the global crisis will continue. Yet I see there are still many greedy, selfish people around who want more Quantitative Easing and want to borrow even more money, which our already burdened children will have to pay dearly for. I have yet to see a solution where the cause of a problem (as with this debt crisis) was its answer.

  • Comment number 31.

    21. At 11:21am on 13 Oct 2010, Anglophone wrote:
    Metal Gasket
    You seem to like spreading around accusations of dumbness! Sadly, the open-ended deficit spending splurge you advocate is both financially illiterate and immoral! You're stealing from your children again!

    I am certainly spreading accusation of dumbness.

    If you want to understand what a budget deficit is read some macro-economic text books. Perhaps you will then realise that the stealing from our children is going on right now in the form of tuition fees and it is unncessary and worse than that, its criminal.

  • Comment number 32.

    The issue of currencies and a possible war has been debated in many places Stephanie and not all are at the level of an "idiots guide."
    I was reading on the notayesmanseconomics blog today that the problems have spread as far as Thailand.
    "Yesterday we saw action from Thailand on this front as the Thai Baht has been very strong recently against the US dollar (sound familiar?) and has risen to levels last seen in the late 90s."
    and perhaps an indication of who may currently be most to blame.
    "To my mind for all the hyperbole coming from US Treasury Secretary Geithner it is US policy which is causing this as much as Chinese policy. In early June the dollar index was 88.71 and it is now 77.02 for a fall of 13.2%."

  • Comment number 33.

    So, in essence:
    - the cinema is on fire
    - they're all charging towards the same exit
    - the exit's narrow, so they (and we) will all get stuck in the doorway and burn

    Naive people would suggest that if they were willing to co-operate, they might all escape to safety. But then that flies in the face of the central dogma of dog-eat-dog-ism.

    I think it's time to dig up the lawn and plant some turnips.

  • Comment number 34.

    25. At 11:33am on 13 Oct 2010, Clive Hill wrote:
    #16 MetalGasket and #17 watriler
    To spend money, the government has either to borrow it; print it or raise it through taxation.

    No it does not.

  • Comment number 35.

    26. At 11:36am on 13 Oct 2010, newblogger wrote:
    It is not just bonds for cash, but 'new' cash - created from thin air.

    No it is not

  • Comment number 36.

    So Stephanie, are you too trying to convince us that "consume" is good and "save" is bad? Are the Chineese the villans here and the Americans and UK the good guys?

  • Comment number 37.

    I don't know if you read your comments (or like Marr choose to ignore all comments that disagree), but I feel you are quite mistaken on this point:

    "if the dollar is going down, then other currencies have to go up."

    Have you seen the price of commodities in the last month? It is *not* the case that other currencies "go up", once you've devalued, loss of purchasing power is baked in the cake. They are playing a dangerous relativistic game of currency devaluation. The end result is loss of purchasing power, that's why you see the price of "stuff" (stuff that you don't need loans to buy) going up.

    All citizens with cash earnings and savings are the losers here, as their purchasing power is reduced.

    I know it is hard for the BBCistas, guardianistas, keynsians and inflationists to get this - but at least the intellectual leaders in the Tea Party get it.

    It's Austrian economics baby - and it *will* make a come back, it is just a question of when - probably after the currency debauchery has occurred, when even the likes of BBC economic editors actually start to "get it" too!

  • Comment number 38.

    Another naive idea:

    If you can produce things which are new and useful, you can probably export them even if your currency is strong.

    Of course, if you want to try this approach, cutting what you spend on R&D probably isn't a good idea. Now, which government has just planned to cut its spending on R&D?

    I'll probably need a shotgun to protect those turnips - buy it with the credit card, obviously.

  • Comment number 39.

    35. At 12:10pm on 13 Oct 2010, MetalGasket wrote:

    26. At 11:36am on 13 Oct 2010, newblogger wrote:
    It is not just bonds for cash, but 'new' cash - created from thin air.

    No it is not

    Yes it is.

  • Comment number 40.

    Unfinanced fiscal stimulus is the only logical solution.

    The reason why QE (and other monetary stimulus measures) fails is because it has very little effect on aggregate demand. One of the main reasons the banks are not lending is because businesses are seen as 'likely to decline' and this is due to the lack of aggregate demand in the economy. Fiscal stimulus will unlock both bank lending and the liquidity that is already in the economy.

    Just an extra 2%GDP (about £28Bn) over-and-above the existing dificit (not borrowed) should be enough to bring unemployment down and tax revenues up quite quickly (inflation allowing), and the money should be injected into geographical areas where unemployment is high and estimated price inflation is tolerable. This would lead to no more than a 1% decline in the value of the £, unlike QE which should be clawed back by selling the corporate bonds the BoE have bought.

  • Comment number 41.

    The thing about stimulus is that it is not about the money itself or where it comes from (borrow it if you like), it is about how you spend it. Fiscal stimulus is a precesion intrument that can be targetted to specific areas of the economy and the country, and be aimed at reducing unemployment. Monetary stimulus is just a blunt instrument. The reduction in the bank rate to 0.5% has only generated an estimated £8Bn into the economy - chicken feed, and the QE liquidity has barely been invested into the real economy at all.

    The primacy of fiscal policy needs to be recognised again, and the monetarists can go to the wall.

  • Comment number 42.

    6. At 09:29am on 13 Oct 2010, User54321 wrote:
    "If we in the UK are going to cheapen our exports(whatever they might be!)"

    You really don't know? If you actually research it Britain is a major exporter.

    Mostly high-tech machines of various sorts. We export everything from Cars (O.K the companies might be Japanese but the plants are here), aircraft engines (Rolls Royce engines hang under a huge number of airliners and military jets), large parts of the airliners themselves (airbus wings) and weapons systems.

    We have a huge chemical and pharmaceutical industry- the worlds largest phramaceutical group is British and much as we always hear about Britains food imports we also export huge amounts of fresh (usually live) meat, fish and extremely profitable stuff like Whisky.

    In addition we're one of the worlds biggest exporters of entertainment. Say what you will about Simon Cowell but he brings in tens of millions. British TV (or its formats) are exported globally. You get 'the weakest link' in 60 countries and I've seen Dad's army, Mr Bean and Taggart to name a few in India, the US and the Czech Republic.

  • Comment number 43.

    #34 MetalGasket
    To spend money, the government has either to borrow it; print it or raise it through taxation.

    No it does not.
    Nah nah ne nah nah.

    Is that the best you can do ?

    Yes it does.

  • Comment number 44.

    Got to be honest and don't see how the math stacks up.

    If we have a strong currency, then buying stuff from abroad becomes cheaper. If we weaken it, that stuff becomes more expensive to us so that what we export becomes cheaper to others.

    Now, if we had a massive resource base in this country from which to make the "stuff" that we export, I could perhaps see some logic (if not entirely advisable) to weakening the currency.

    But, as I understand it, we don't. So, we weaken the currency to make our exportable stuff cheaper, but doesn't that mean the input price of the raw materials (since we need to import the raw materials) gets more expensive to us? And thus pushes-up the price at which we have to sell(an offset?) making it more expensive again, or we deminish the potential profit (by not increasing the sell price) and reduce the profit from which we can extract taxes and try to make a living.

    Zero-sum game?

  • Comment number 45.

    Stephanie is right. There will be a currency war, but China (and other Asian countries) will have caused it.

    China has piled up $2,500 bn of currency reserves, about 65% in US Dollars, and about 25% in Euros. If China had let its currency float freely, it wouldn't have any of these reserves. Zero reserves.

    Does anybody know or remember how big Britain's reserves are? Thought not. Nobody remembers because Britain's reserves are not news, they are not an issue, they are not used to intervene in currency markets.

    China intervenes to subsidise exports and make other countries' goods more expensive in China. This intervention is now to the tune of something like 125% of Chinese GDP. Thus more than one year's entire output of Chinese workers has been taken away from them,to rig financial markets in favour of China and against Western countries which still believe in free markets.

    The financial crisis has finally brought home that the US and Britain and Europe can no longer subsidise Chinese expansion at the expense of their own citizens. This process will end. Anyone who thinks the US will any longer tolerate the US Dollar being boosted by Chinese purchases while stalling US recovery, is kidding themselves. I anticipate the US will impose a tariff on all Chinese goods, hopefully in excess of 20%. I would like to see the British government to set up an independent commission to make a judgement about the extent of renmimbi undervaluation compared to Sterling, and once that judgement is made, impose an immediate (overnight)tariff on Chinese goods to correct the difference. Once again, I would expect the tariff to be 20% to 30%. No consultation, no discussion, just do it. The Chinese, like other authoritarian regimes, only respect action, not talk.

    By the way, the US does not need China. Not only self-sufficient in food and most raw materials, apart from energy, the US can survive a world trade war quite well. The Chinese can't, their system is set up for a global economy, which is in the process of collapsing. Chine hubris will be followed by the inevitable.

  • Comment number 46.

    39. At 12:52pm on 13 Oct 2010, newblogger

    Taking a quote from the article. Don't always trust the Beeb.

    'The way the central bank does this is by buying assets - usually financial assets such as government and corporate bonds - using money it has simply created out of thin air.'

    The point is that the financial assets it is buying are Gilts. Gilts are marginally less liquid than cash. So if you swap a gilt with a giltholder for cash how does this equate to money being injected anywhere. Do you think the giltholder is likely to keep it as cash just so it can be loaned out to deserving businesses and households?

    The banks will always find a way to lend to anyone it considers can pay it back with interest providing its worth its while to lend.
    It's not the liquidity thats the problem at the moment, its that the banks consider lending to many people a very bad idea in the current climate.

    I would too if you factor in what the Govt is doing

  • Comment number 47.

    43. At 1:13pm on 13 Oct 2010, Clive Hill

    OK Clive. Lets test your 'ideas' on the subject of money.

    If you were introducing money into a remote island that currently used barter as a means of exchange. How would you do it ? You can be the Island Govt or Bank if you like. The only condition is that it must be its own sovereign currency.

  • Comment number 48.

    It is absolutely disgusting how USA and Europe are dictating what China should do. According to a BBC article regarding China's currency:

    Christina Romer, a former economic adviser to President Obama:

    "China should put in place a healthcare system, so that people save less - because they wouldn't have to worry about paying for treatment. They would then buy more products from the rest of the world....the rest of the world wants change. "

    Excuse me, SHOULD? When China was moaning about who was awarded the Nobel Prize, did the West take note? Indeed, when China was asking for the illegal opium imports to stop as it was devastating the country, did the West care? I don't see a single reason why China should give in, due to it's prior history with the West.... after all, the very notion of the USA or the EU changing their policy to favour Chinese opinions is ludicrous.

    China has always been an export driven country, just look at it's status in history - indeed the whole reason for the Opium wars came because of it. Looks like the West have resumed with the bullying, 150 years later. One hopes their reformed military will make it a more difficult job second time round.

  • Comment number 49.

    #34 #35 metalgasket

    I'm interested. Apart from tax, print or borrow the only way I can see the Government raising money for additional expenditure is by selling assets. I would include in "print" any mechanism by which the Government spends money that it doesn't have and/or can't borrow against future revenue (in which regard, borrow is merely bringing forward spending of money raised by taxation). What else is there?

    To my eye "print" includes the creation of credit in the BoE in return for assets (duff assets and Government bonds) "bought" under QE. Would I be right in assuming that the reason this money has not been created "out of thin air" is the idea that the bonds still exist and could, in theory, be sold?

  • Comment number 50.

    #45 Dismaleconomist

    Names says it all.

    I can't believe the doublespeak. This is truly Orwellian.

    1. Debauched currency == Good
    2. Stong currency == Bad

    With 1. Citizens lack purchasing power and can buy fewer goods with their hard earned wonga.
    With 2. they can buy more goods!

    And yet those who are brainwashed by this doublespeak from the ministry of truth have convinced a population that a weak currency is a "good thing" TM


  • Comment number 51.

    49. At 1:57pm on 13 Oct 2010, tFoth wrote:
    I'm interested. Apart from tax, print or borrow the only way I can see the Government raising money for additional expenditure is by selling assets. I would include in "print" any mechanism by which the Government spends money that it doesn't have and/or can't borrow against future revenue (in which regard, borrow is merely bringing forward spending of money raised by taxation). What else is there?

    By spending....

    By upping the bank account of whomever it is buying goods and services from. No printing necessary.

  • Comment number 52.

    Oh dear, most of you, including SF are still pushing for the 'bau lets have growth at all costs' economics that has failed and has been completely discredited. This is the economics that completely failed to predict the demise of banking/finance that started to be obvious in 2008 and is still going on and will go on for a long time. In fact most likely for ever. This is the broken thinking that assumes resources such as materials and energy are always going to be available i.e. they can't be used up. The broken thinking that says growth is good and can go on for ever, it isn't and it can't. The broken thinking that got us into this mess and won't get us out of it.

    Somebody much clever than me and much more far sighted than most of the contributors to this blog said 'you can't solve a problem using the same brains that created it'. So lets junk the economics that made the mess (and the economists that still can't see that this economics is the problem not the solution). Stop teaching this rubbish in universities/colleges and get some new thinking and new brains on the case. What is needed is steady state economics and sustainable activity and it isn't going to look like anything your used to. Lets look at needs instead of wants and lets try to solve the problems rather than just carrying headlong into the future trying to make it like it was before. Remember we have shown that that did not work.

  • Comment number 53.

    #46 and #49

    The fact that QE hasn't worked, or that it has been used to finance the government by buying more gilts does not take away from the fact that the QE money is 'new central bank money'. It was not money that already existed. It directly increased the money supply.

    If, and this is a big IF, it hits the high street, it could be inflationary. In Japan, the banks sat on it. It looks like this is what has happened here too.

    It is only deflationary when the gilts are sold again and the money raised from selling them is destroyed by the BOE.

    However, it is more likely we will have QE2 instead.

  • Comment number 54.

    For a little good news (if you're British)...
    I'm a motorcyclist and the impact of the pound devaluing somewhat over the last couple of years has had an enormous impact on the price of Japanese motorcyles (much higher) relative to Britsh ones (Triumph), which are now much cheaper.
    It has to be said that this has had a devastating effect, in particular on Suzuki and Yamaha, whilst Triumph has become one of the fastest growing motorcycle companies in the world, and exports about 85% of what it makes.

  • Comment number 55.

    #52. peter_t_clarke wrote:
    "Oh dear, most of you, including SF are still pushing for the 'lets have growth at all costs'"...
    "What is needed is steady state economics and sustainable activity"...
    "Lets look at needs instead of wants"...

    Thank you Peter, it's good to see there are others out there that think sensibly.

    Indeed let's replace
    "continuous growth" with SUSTAINABLE DEVELOPMENT
    "consumer confidence" with BASIC NEEDS OF A DECENT LIFESTYLE
    and investigate excessive profits.

  • Comment number 56.

    If a weak currency was the only way to get growth how come Switzerland and Norway are doing so much better than the UK and most other western economies? Is it because they didn't allow themselves to get conned into joining the EU?

    The addicts are asking for another Keynesian fix when the last one failed to do the job, as was only to be expected. And so now the problem is even worse than before, with debt piling on debt and inflation showing more growth than GDP. And no doubt if they did get their fix the debt crisis would be even greater next year.

  • Comment number 57.

    #48 RandomArbiter,

    You are right in so far as China, India or any other developng nation chould not and cannot be forced to develop healthcare systems etc. However, China etc should not expect to take advantage of the cost savings they achieve because such programmes do not exist there. Hence, it is equitable for Western economies to calculate the cost advantages and attach them to their imports in the form of tarrifs. This then creates a level playingfild. If chinese goods still carry a competitive advantage over domestic goods then they will have no problem in achieving sales. If chinese companies want to establish facilities to further penetrate our markets they should be allowed to do so - but only under the same rules that exist to constrain western penetration of their domestic market.

    As for the Chinese military, it remains untested (except for a few million Tibetans). Let's hope for all of our sakes it remains that way.

  • Comment number 58.

    54. At 2:34pm on 13 Oct 2010, edge540 wrote:
    It has to be said that this has had a devastating effect, in particular on Suzuki and Yamaha, whilst Triumph has become one of the fastest growing motorcycle companies in the world, and exports about 85% of what it makes.

    Good news! An example of interest rates doing what they are supposed to ev doing. Your business is creating demand for sterling, providing jobs, and spending alot of those profits in the UK economy no doubt.
    Unfortunately any rise in exports will not be sufficient to replace the drop in Govt Spending which is I why the proposed cuts are a real threal to the real economy, to real people and to real jobs.

    Don't get caught up in the mass hysteria about the deficit which merely reflects increased savings, reducing private debt and the lack of private wealth being invested in the economy. Why should the latter be invested when you can get 4% and/or an instant profit from buying gilts.

  • Comment number 59.

    #55 RefornNotRevolution,

    "Indeed let's replace
    "continuous growth" with SUSTAINABLE DEVELOPMENT
    "consumer confidence" with BASIC NEEDS OF A DECENT LIFESTYLE
    and investigate excessive profits."

    Interesting. Care to tell us what you actually mean by SUSTAINABLE DEVELOPMENT and what exactly the BASIC NEEDS OF A DECENT LIFESTYLE consists of?

  • Comment number 60.

    59. At 4:30pm on 13 Oct 2010, foredeckdave
    House, job, car, Blackberry, good schools, satellite TV, 2 holidays a year, decent pension, world peace, an end to famine and no more wars.
    That should do it. Oh and it would be nice to have 1 or 2 luxuries too if possible.

  • Comment number 61.

    59. foredeckdave wrote:
    "Interesting. Care to tell us what you actually mean by SUSTAINABLE DEVELOPMENT and what exactly the BASIC NEEDS OF A DECENT LIFESTYLE consists of?"

    I suppose you are just trolling me since it is plain English, but I will take it as a genuine question.

    "Continuous growth" as well as "no return to boom and bust" have been ditched to the history garbage bin, do we agree? So why are the economists and politicians still banging on about it? The aim should be to break even and if a small profit has been made then that should be regarded as a bonus. If for a year or two the company doesn't make a profit (but is close to breaking even), this should not be regarded as a catastrophe, as it stands now, is either "grow or die".

    I still cannot understand why my welfare (and indeed the world economy) should be dependent on how Dylan and Ashley feel like buying more bling-bling they don't need (that's "consumer confidence" for you). Yes a civilised society needs more than bread, some "circus" should be there for your pastime, but the level of spending on circus in western society is ridiculous.

    I'm surprised you haven't picked up on my "investigate profits" :-)
    In a few words (since I'm at it and just in case) every obscene profit should be automatically referred to a court for investigation and the extra re-distributed to those who were ripped off (customers, providers, employee...). At the moment we tax it and we say it's fair. It's not.

  • Comment number 62.

    60. At 4:51pm on 13 Oct 2010, MetalGasket wrote:
    59. At 4:30pm on 13 Oct 2010, foredeckdave
    House, job, car, Blackberry, good schools, satellite TV, 2 holidays a year, decent pension, world peace, an end to famine and no more wars.
    That should do it. Oh and it would be nice to have 1 or 2 luxuries too if possible.

    I'd suggest taking a look at the CASSE website (Centre for the Advancement of Steady State Economy):

    And then consider how a to provide Sat TV, Burberries, cars, etc for the whole population - since these all take natural resources to produce and are not sustainable in the very long term (and ARE a luxury - you need don't need them to live).

    #52. peter_t_clarke
    Good post and echoes much of what I have been reading lately. However, there a couple of issues:

    1) getting through to the general populous that their current ideas of "consumption" need to be considerably reduced - and that they will benefit from it (but, too many are still suckered into the marketing hype of "modern" lifestyles as the tongue-in-cheek, I hope, MetalGasket answer shows)

    2) mainstream economists and politicians won't even consider the debate - let alone a BBC blog, so good luck pusing the idea, esp. here

    3) population overshoot versus individual over-consumption versus the "wealth" redistribution arguments - still falling on "deaf ears" in the majority of cases

    55. At 3:10pm on 13 Oct 2010, ReformNotRevolution
    Hope your monika proves correct and that we (the planet of humans) can achieve the result through reform rather than revolution. But, judging by the general reaction of many, it will take a revolution (esp. in their thinking and outlook) to achieve anything near a steady-state economy (at least as envisaged by those that support the idea).

    What I think is more likely is that we'll "steady state" through dips and spikes as the ruling-class (ha-ha) and majority strive for BAU and won't address what's actually staring them in the face. And that's probably set to continue over the next 5-30 years (depending on available resources). Before it all then completely collapses with ensuing die-off and MAYBE then the remaining people will eventually listen to trying a new way. I'm afrid too many vested interests at the moment pushing the "old ways" to get the traction needed to turn around and try something different.

  • Comment number 63.

    #61 ReformNotRevolution,

    I am most certainly not trolling neither am I a WUM. I am however exasperated by people stringing together catch phrases as though they represented a new philosophy when they are infact merely 'hot air'.

    Merely stating that other hackneyed phrases are, in your opinion, designated for the dustbin of history is not an explanation. Neither does your breakeven comments explain Sustainable Development.

    Your 3rd paragraph gives no further insight into what the boundaries of a Basic Need of a Decent Lifestyle maybe. What have Dylan and Ashley to do with anything?

    Please in all of our interests be more specific.

  • Comment number 64.

    What do people need? Actually not much really. Apparently from research that has been done western world people have not seen/felt/think their sense of 'well being' increase since about the mid to late 1950s. So since about 1957ish their disposable income has increased but they don't feel any better about it.

    Interestingly the world population has almost tripled since then. So more money and more people hasn't helped and from MetalGasket's list the following items can be crossed off since they have appeared since 1957.

    Car, Blackberry, satellite TV, 2 holidays a year. Ok some people had a car but very few. To which you can add anything else that has appeared/wasn't possible since 1957 or so.

    From the rest of the list very few owned their own house (and look where home ownership got us in the old plan. For decent pension I think we should read proper extended family care for oldies.

    So needs are probably food, comfortable shelter, warmth, family and friends on a human scale and something to make us smile now and again. Probably experiences of shared pleasure rather than heaps of stuff.

  • Comment number 65.

    There is no chance of the US and UK populations deciding to save more whilst:
    1/ they are up to their necks in debt:
    2/ whilst the interest rates are so low compared to the rates of price increases:
    3/ the prospect of higher interest rates is equally frightening for those with a big mortgage on a property that is likely to decline in value dramatically over the next few years:
    4/ whilst the needed public sector cuts reduce demand and frighten people into paying off debt as their first priority:

  • Comment number 66.

    #64 peter_t_clarke,

    Even Maslow's Hierachy of Needs allowed for more than merely basic needs. What existed before or after 1957 is neither here nor there. You can be sure that I would resist going back to no central heating and ice on the inside of bedroom windows.

  • Comment number 67.

    If China allows its currency to strengthen then we only get a new problem, its huge government sovereign fund will just buy up companies from abroad shifting more jobs to China. I think the focus should be for western nations to make themselves more productive and competitive, we now live and work in a global market place. Second the west needs to start saving more and stop living off debt which ultimately is funded by China.

  • Comment number 68.

    Sterling has been getting weaker for decades. Look at the historical Swiss Franc/Pound rates, for example.
    1960 it was 12
    1996 it was 2
    now it's close to 1.50

    So much for a "weak currency" strategy. And I'm not sure it is EU related (@ Sandy Winder post 56). Before WW2 the rate was about 30 Swiss Francs/Pound. (I think)

  • Comment number 69.

    #67 William,

    "we now live and work in a global market place."

    It is the nature and structure of that global market place that has created the enviornment for the present mess.

    Now some suggestions as to how Western nations are supposed to make themselves "more productive and competitive" would be welcome!

  • Comment number 70.

    Should be interesting what happens in this currency war over the next couple of years.

    From my view USA should just make their dollar weaker so that they can increase their exports and compete with China. China is currently in the middle of its booming years, where its growing rapidly into a superpower nation. USA are just jealous that China is growing rapidly and USA cannot compete at that level so they are trying to force China to slow in growth. China should be allowed whatever they want to do with the yuan and ignore what USA and the rest of the world are says to China.

    Obviously economy growth is more dependent on net exports rather than the domestic economy and that is true for China. If yuan rises, all the goods China exports to the rest of the world will go up in price leading to other problems across the world.

    The same applies for UK, currently UK is growing very slowly so its better to let the pound get weaker so UK can increase net exports and hopefully increase UK's growth. Especially during times like now when there are massive cuts and domestic spending is likely to decrease over the next few years due to these massive spending cuts

  • Comment number 71.

    51# metal gasket

    Then we are talking about "printing". As I said originally, "printing" is a broader concept than just making physical notes. It make no difference if you are putting a credit into someones bank account or a note into their pocket - the effect is the same.

  • Comment number 72.

    In that case, the Govt issuing debt and collecting tax is 'unprinting money' You will no doubt say that it is needs to do this to spend. I am contending that it does not. The Sovereign issuer of the a fiat currency creates money when it spends.

    Go back to my ealier post 47 to Clive about how you would introduce money into a barter economy. The Govt would buy up goods and services using the new currency. It wouldn't borrow it from a bank a no banks would exist. OK at some point someone might open up a private bank and the Govt may allow FRB but this creation of money is merely leveraging the 'High Powered Money' orininally created by the Govt spending and would be constrained by the demand for money at the price (interest) offered rather than any reserve ratio.

    The price of money can be controlled by the Govt through money market operations with the commercial banks, buying and selling gilts and reserve requirements but it does not need to borrow to spend.

    Taxation is important in the sense that in order to maintain confidence in the currency people are required to then chase this money in order to pay their taxes.

  • Comment number 73.


    At the heart of the problem is the banking crisis which was followed by national/international calls for stability and agreements.

    This was fine at first, stimulous packages were introduced across the board and even economic policy was aligned to stimulous, but then panic set in and now nations, especially trading blocks, have actually fragmented and it is now open season for doing whats best for yourself

    Thing is, due to banking collapse nations started to sink as fast as the Titanic. Now there is another breach, which the consequences of a greater incoming detrimental economic tide will fully come to the fore during the first half of 2011 as so many countrys implement MASSIVE cuts.

    In such a situation the most important factor is SURVIVAL, its survival of the fittest/strongest, taking advantage of ANY advantage.

    USA is fundamentally economically very very weak, hence its strength is essentially in its dominant military position and also in its dominant debt position, which just like some large banks which are too big to fall, the USA is far far greater and holds power of sway due solely to its massive level of debt.

    If USA goes down, it takes the world with it, but likewise if any reasonabl European economy goes down then it will still have the same domino effect, but slightly slower bumpy ride, but NOT by much.

    The real threat is NOT just of global currency war, but a war of survival.

    If USA economy is smashed up, it will lose its military position in the world and so much of those imports it relys upon to sustain it will become under threat.

    If you are seriously ill, under threat of death, if medication was available to prevent your death and you were refused access to it, what do you do.

    As individuals there will be some who take whats enevitable, others who will not.

    A WHOLE nation is different, and as with past history, attempts will be made to acquire that which is needed/demanded.

    I personally think that USA is in danger of becoming an entity more resembling Adolf Nazi Germany.

    The ultra right wing christians are gaining significan power, and this coming mid term election may empower them more. Their view on truth/facts morals/ethics is truelly warped and their views on the world and other governing entitys, whether socialist/communist/ liberalist or Islamic, is regarded as totally wrong. Their stance is a worry, moreso if they gain any position of power, and I personally think that such gain will enevitably lead the world into huge fragmentation due to policy dictate of such people and ultimately lead to trade wars and even possibly military wars. Especially because these right wing christian believe that they are right and what they do is purely in gods name.

    Hence, I personally feel there is more to be afraid of from these USA extreme right wing christians than from the Taleba/ Al Queda, Hamas, the Real IRA and every world terrorist group put together.

    A global currency war would factually , historically evident, just be the start of something MUCH MUCH bigger and DANGEROUS.

  • Comment number 74.

    It has been widely reported in the past that chinese government publicists watch high profile western media and provide large volume commentary to debunk or misdirect anti-china commentary.

    I've been having fun counting the number of posts overtly pro-china, or those subtly seeking to misdirect anti-china comments, or where incorrect use of english phrases cause one to question the authenticity of the writer.

    So far, I'm up to about 10% of the posts on this particular topic. That's impressive.

    It proves that the BBC is a high profile media outlet, and also suggests that the prospect of a currency war is a quite 'sensitive' topic, where blame needs to be shifted elsewhere.

  • Comment number 75.

    I read the other day that another round of QE in the US will hit the Chinese particularly hard. Moreover, it will be not the case of war, but rather the terms of the Chinese surrender that will be the issue.

  • Comment number 76.

    Coming out of the financial crisis, every country wants to grow as fast it can. That's not the problem. The problem is how.

    ? Coming out of Cancer Treatment, every tumour cell wants to grow as fast as it can. The problem is not how. That is the problem. ?

    The United States and Britain have the largest budget deficits in the G20 - which means they're looking at years of cuts.

    You can cut out tumours, or you can stimulate the immune system that when (young and) healthy kills them off.

    They're looking for exports to pick up the slack, and the best way to boost exports is through a weaker currency.

    The tumourous parts always look for more blood circulation from the non-tumourous parts, the heart and the brain for example.. The Best Way to do this for a tumour to temporarily appear to go into recession.


    Economics is so intellectually bogged down, it's a wonder that it deserves to be called a discipline, let alone a science.

    I am proud to say I am not trained as an economist, and to me it is obvious that mature economies currently suffering from malignancies have to redesign their economic systems, so that there is more self-sufficiency, international redundancy (duplication of economic effort between themselves and other parts of the world) and in one word, localism.

    Striving for economic "growth" in the trite convention way over the past 70/80 years is a singular obsession that is misguided.

    Hopefully someone consequential will read this and pick up on it, but since it is Stephanie Flanders' blog, I wouldn't guarantee it!

  • Comment number 77.

    71 tFoth,
    ALL money spent by the government is created from nothing, and all taxes paid to the government returns to nothing. This is an accounting fact.

    During the era of gold standard, deficits had to be matched £ for £ by issuance of government debt. Since the end of Gold Standard and the collapse of Bretton Woods (when our currency was floated), the BoE no longer needs to issue debt £ for £ in response to a budget deficit, as the slack is taken up by our free-floating currency.

    Yet even where the BoE (unnecessarily) issues debt, the money the government spends has STILL been created from nothing, and the debt issuance is seperate from this. The reason why nobody in power tells us this is because they don't think ordinary people can understand it.

  • Comment number 78.

    76 verano,
    Modern Monetary Theory (MMT) (as distinct from mainstream neoliberal economics) doesn't believe in growth for its own sake, it only believes in growth up to the point that: a)full employment is achieved; b)there is sufficient real productivity/resources to fuel it and c) the growth does not rely on credit, but on an adequate level of real wages.

    Beyond this, growth is not necessary.

    Kind REgards

  • Comment number 79.

    I have to agree that in the past twenty years we have all experienced some false growth, based on the debts used to buy houses which in turn artificially inflated there prices.

    The question I would be asking if I was British however, would be, how and why, in these twenty or so years of economic prosperity, did the government continue to post deficits in the UK.

    I'm from Australia, and we had a prime minister who abolished the debt and ran the nation into a 50 billion dollar surplice, much the same path that China took after 1989. This has enabled Australia to spend money in keeping with Keynesian politics, on anything it wishes during the crisis, and to be back in surplus in two years. Personally I disagree with borrowing, but it is not such a contentious issue as we had no debt before hand. How did Britain rake up an enormous debt during times of economic prosperity?

    PS the raw materials of Australia are looking pretty brilliant now :)probably shouldn't have forced Australia into independence, quite short sited really.

  • Comment number 80.

    Its always good to start the day off with a laugh. Thanks
    The only reason Australia has had budget surplus over the last decade is because private debt has been rocketing.

    People are starting to realise this and are reducing that debt by spending less so you're back in budget deficit. Thats a good thing believe me. The real problem is that your government seems to want to go back into surplus rather than spending to maintain jobs and output. You've got a recession coming mate.

  • Comment number 81.

    #80. MetalGasket wrote:
    "You've got a recession coming mate."

    Yes, but isn't it always a recession coming?
    Samuel's point about our deficit during booming years (because "we shall not return to boom and bust") is very valid.

    And the reason why we in UK don't have a recession coming is because we are in one. Don't tell me the 1% growth this year contradicts me, it's just playing numbers and the big QE of last year has something to do with it. As the growth of 2011 - I guess they will make sure we get our QE2 to ensure that happens.


BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.