Currency War Between China and Usa Essay

Currency WarCurrency war, also cognize as competitive devaluation, is a condition in international personal matters where countries compete a solvest each other to achieve a relatively low telephone supercede target for their own gold. As the toll to buy a particular up-to-dateness falls so too does the real particularize of exports from the arna. Imports become more postgraduate-ticket(prenominal) too, so domesticated industry, and thus employment, receives a boost in demand both at home and abroad. However, the price increase in imports corporation harm citizens buying power. The policy net also trigger retaliatory action by other countries which in turn give the axe lead to a general diminution in international passel, harming all countries.Reasons of Currency War Between USA and chinaCompetitive devaluation has been r atomic number 18 through or so of history as countries render largely preferred to maintain a high order for their silver, only it happe ns when devaluation occur. chinaw ar keeps its dollar artificially low so that countries like the US leave behind buy its goods. mainland China is the USs largest trade partner and if they didnt sell their goods for super cheap, grocerys like India would be able to under twist the Chinese and thusly the US would buy goods from Indian instead of China. thither is so much trade mingled with China and the US that China profits immensely without needing its Yuan to appreciate. This of course hurts the average Chinese person in that their labour is de think ofd but it beneficial for the body politic as a whole as it has degenerately become a super power economicaly.In 2008, a principal paid atomic number 53 Ghana Cedi for one U.S. dollar, but at the beginning of April 2012, the same trader travelling to Dubai paid GH1.74 for one U.S. dollar.This means that year-on-year decline in the take account of cedi against the US dollar was 74 per centime over a three-year result.A p oint to none is that during the world-wide economic crises of 2008-2009, the cedi depreciated by 25 per cent against the dollar.Between 2010 and 2011, the cedi again depreciated 18.5 per cent against the US dollar. For last month, the cedi exchange rate depreciated 4.29 percent against the US dollar.So is the current downward slide in the cedi value as a result of the slowdown in the global economy or due to internal structural weaknesses? This question requires a detailed research work beyond the scope of this article but it is a very relevant question to ask at this time.In economics, depreciation is basically the symptoms of an underlying problem, specifically imbalances in the Balance of salary (BOP), emanating from excess demand for dollars. So instead of discussing the depreciating cedi, I leave rather focus my attention on the display cases or factors that urinate funds to depreciate and what the government git do to arrest this problem in special cases.Before then (prenominal), I moldiness let readers know the disagreement between bullion fluctuation and depreciation. Fluctuations in currency value be a common event and are usually no evidence for concern. The minor daily increases and decreases in value are generally due to random walk and not due to an economic event or fundamental problems.However, changes in currency value become significant when the decline in value of the currency is an on dismission trend. Technically, when currency depreciates, it loses value and purchasing power, with impact on the real sectors of the economy.Although, the economic effects of a freeze off cedi take time to happen, thither are time lags between a change in the exchange rate and changes in commodity prices.Factors that determine the value of a currency include the current state of the boilersuit economy, inflation, trade balance (the difference between the value of export and import), train of policy-making stability, etc.Occasionally, external factors like currency speculations on the immaterial exchange market can also alter to depreciation of the topical anesthetic currency. Such being the case, a government can intervene into the immaterial exchange market to support its national currency and suppress the growth of depreciation.Currency depreciation can positively impact the overall economic development, though. It boosts competitiveness through lower export costs and secures more income from exported goods in a similar way devaluation does.On the contrary, depreciation makes imports more expensive and discourages purchases of imported goods stimulating demand for domestically manufactured goods.Globally, governments intentionally mold the value of their currency utilising the powerful tool of the base refer grade, which are usually set by the commonwealths substitution bound and this tool is frequentlytimes used to intentionally depreciate the currency rates to encourage exports. Factors that can locom ote a currency to depreciate areSupply and Demand Just as with goods and services, the principles of supply and demand hire to the appreciation and depreciation of currency values. If a country injects new currency into its economy, it increases the currency supply. When at that place is more money circulating in an economy, there is less demand. This depreciates the value of the currency. On the other hand, when there is a high domestic or opposed demand for a countrys currency, the currency appreciates in value.Inflation Inflation occurs when the general prices of goods and services in a country increase. Inflation causes the value of the cedi to depreciate, reducing purchasing power. If there is rampant inflation, then a currency leave behind depreciate in value.What causes inflation? Printing Money. Note printing money does not endlessly cause inflation. It allow occur when the money supply is increased winged than the growth of real output. Note the link between printin g money and causing inflation is not straightforward. The money supply does not respectable depend on the amount the government prints. Large National Debt. To finance large national debts, governments often print money and this can cause inflation.Economic OutlookIf a countrys economy is in a slow growth or recessionary phase, the value of their currency depreciates. The value of a countrys currency also depreciates if its major(ip) economic indicators like retail sales and Gross Domestic Product, or GDP, are declining. A high and/or rising unemployment rate can also depreciate currency value because it indicates an economic slowdown. If a countrys economy is in a strong growth period, the value of their currency appreciates.Trade DeficitA trade deficit occurs when the value of goods a country imports is more than the value of goods it exports. When the trade deficit of a country increases, the value of the domestic currency depreciates against the value of the currency of its tra ding partners.The demand for imports should fall as imports become more expensive. However, some imports are essential for production or cannot be made in the country and have an inelastic demandwe end up spending more on these when the exchange rate falls in value. This can cause the balance of payments to worsen in the short run (a process know as the J curve effect)Collapse of ConfidenceIf there is a collapse of confidence in an economy or financial sector, this will lead to an outflow of currency as people do not want to risk losing their currency. Therefore, this causes an outflow of capital and depreciation in the exchange rate. Collapse in confidence can be due to political or economic factors.Price of Commoditiesif an economy depends on exports of raw materials, a fall in the price of this raw material can cause a fall in export revenue and depreciation in the exchange rate. For example, in 2011, a ton of cocoa sold for US4,000 per ton. Currently, it is going for US$2,300 pe r ton, translating into fewer inflows of dollars.Interest rate DifferentialI will use the International Fischer Effect to explain the relationship between the anticipate change in the current exchange rate between the cedi and the dollar, which is virtually equivalent to the difference between Ghana and US nominal interest rates for that time.For example, if the average interest rate in Ghana for 2011 was 24 per cent and for US was three per cent, then the dollar should appreciate close to 21 per cent or the cedi must depreciate 21 per cent compared to the dollar to indemnify parity.The rationale for the IFE is that a country with a higher(prenominal) interest rate will also tend to have a higher inflation rate. This increased amount of inflation should cause the currency in the country with the high interest rate to depreciate against a country with lower interest rates.Market SpeculationsMarket speculations can contribute to a process of spiraling depreciation afterward small er market players decide to follow the example of the leading dealers, the so-called market makers, and after they lost confidence in a particular currency start to sell it in bulk amounts. Then only a quick reaction of the countrys central bank can restore the confidence of investors and stop the currency rates of the nations currency from continuous decline.When the currency depreciation is based on market speculations, in other words, not backed by fundamental economic factors, then the central bank comes to the rescue- intervene.A sterilised intervention against depreciation can only be effective in the medium term if the underlying cause behind the currencys loss of value can be addressed. If the cause was a speculative attack based on political uncertainty this can potentially be resolved.Because after a sterilised intervention the money supply remains unchanged at its high level, the locally available interest rates can soundless be relatively low, so the carry trade continu es and if it still wants to delay depreciation the central bank has to intervene again. This can only go on so long before the bank runs out of foreign currency reserves.In conclusion, currency depreciation is the result of fundamental deficiencies with the domestic economy which must be corrected over a period of time to restore balance. However, where the depreciation is out of speculative attacks on the currency, then the central bank can intervene to correct the temporary anomalies, which, often is short term in nature.Lastly, intervention in the foreign exchange market by the central bank to correct fundamental weaknesses, precisely like the Ghanaian situation will not work, because, very soon, the central bank will run out of international reserves hence, the cedi must therefore seek its equilibrium level.The writer is an economic consultant and antecedent Assistant Professor of Finance and Economics at Alabama affirm University. Montgomery, Alabama.Currency War in the Gre at firstDuring the Great Depression of the 1930s, most countries abandoned the gold standard, resulting in currencies that no longer had natural value. With widespread high unemployment, devaluations became common. Effectively, nations were competing to export unemployment, a policy that has frequently been depict as beggar thy neighbour.30 However, because the effects of a devaluation would soon be counteracted by a corresponding devaluation by trading partners, few nations would gain an enduring advantage. On the other hand, the fluctuations in exchange rates were often harmful for international traders, and global trade declined sharply as a result, hurting all economies. The exact starting date of the 1930s currency war is open to debate.23 The three principal parties were Great Britain, France, and the United States.For most of the 1920s the three generally had coinciding interests, both the US and France back up Britains efforts to raise greatests value against market forc es. collaborationism was aided by strong personal friendships among the nations central bankers, especially between Britains Montagu Norman and Americas Benjamin Strong until the latter(prenominal)s early death in 1928. Soon after the beleaguer Street Crash of 1929, France lost faith in Sterling as a source of value and begun selling it heavily on the markets.From Britains perspective both France and the US were no longer playing by the rules of the gold standard. Instead of allowing gold inflows to increase their money supplies (which would have spread out those economies but reduced their trade surpluses) France and the US began sterilising the inflows, building up hoards of gold. These factors contributed to the Sterling crises of 1931 in September of that year Great Britain substantially devalued and took the beat off the gold standard. For several years after this global trade was disrupted by competitive devaluation. The currency war of the 1930s is generally considered to have ended with the Tripartite monetary agreement of 1936.