Military analogies should be handled with care. As finance ministers from the most powerful nations prepare to meet this weekend, the talk was of a currency “war”. What does this mean? And if warfare is in the offing, are there any ways to profit from the spoils of war?
In some ways a currency war would be a modern form for a trade war. It does not do these days to admit to being protectionist in polite society. Globalisation is now held to be almost a self-evident good. But if countries can no longer be so overt about protecting themselves with tariffs, they can still use their currencies as a shield. An undervalued currency makes imports more expensive for the locals, while making exports cheaper for foreigners. That is exactly what happens under tariffs.
Currencies move freely. The war-era Bretton Woods agreement, in which the capitalist world’s currencies were tied to the US dollar, which was in turn tied to gold, came to an end in 1971, when President Nixon decided to remove the link to gold – and immediately used the freedom to embark on a big monetary expansion that greatly aided his chances of re-election the following year. Now, markets set prices in foreign exchange markets. Few politicians want to sacrifice their freedom by going back to a pre-Nixon tie to gold.