Initially, alternative thinkers like Jim Rickards have forwarded the concept of currency wars. But back then, the idea read more like a Tom Clancy thriller. Certainly, the possibility of mass-scale economic conflicts was a real one. During the earlier phase of this decade, global powers were still reeling from the 2008 financial crisis. At that time, the focus was on recovery, not necessarily competition.
But over the last several days, the calculus of currency wars has changed. No longer limited to the dire forecasts of renowned futurists, this concept has now gained something only real phenomenon lever: traction. With the Trump administration labeling China as a currency manipulator, we no longer have an immediate pathway to normal relations. Instead, we’re looking at outright economic hostilities.
Before we dive in, it’s important to realize that the “manipulation” tag is largely symbolic. This is not the first time the U.S. government used the label, nor will it be the last. What matters here is the Trump White House’s underlying tone and posture. They’re not willing to give an inch to the Chinese. To demonstrate its resolve, the President has signaled that it will do anything to put American interests first.
Of course, that leaves China in a bind. For one thing, the Chinese traditionally value the concept of “face.” But in this escalating conflict, their government is losing it. Totalitarian administrations like the Chinese Communist Party rely on credibility. Thus, Trump’s war of words are incredibly damaging and essentially force China to respond.
And they’re doing so with a so far passive devaluation of their currency. Without the aforementioned pathway to normalcy, the currency wars have only one direction: further escalation.
The Irony of the Currency Wars
Proponents of President Trump claim that the U.S. must hold China accountable for various breaches of international law. On principle, I don’t disagree. Trading relations must occur on fair and transparent platforms. With our historical relations with China, it’s been anything but fair and transparent.
But on the other hand, China is the world’s number-two economy. You can’t have a strongarm, ham-fisted diplomacy, especially when you’re the leader of the free world. Such tactics only work if you’re the smaller fish trying to troll your way up. But with U.S. foreign policy, an added pressure exists to calmly elect the best course of action.
While Donald Trump won the 2016 election on the fact that he’s not a politician, a politician is what we need right now. But instead of a firm but malleable diplomacy, we’re in the middle of a stark, zero-sum game strategy.
Trump might be trying to scare the Chinese into acquiescence. But in the meantime, he’s succeeding in scaring the crap out of everybody else. This fear drives entire nations into safe-haven assets, one of them being the U.S. dollar.
Thus, while Trump’s Fed is responding with their own interest rate cuts to devalue the greenback, the fierce rhetoric from the White House is negating this devaluation. Instead, the greenback will potentially rise in value as fearful investors pile into U.S. Treasuries.
And what happens at that point? Perhaps a panic to artificially and directly devalue global currencies for export competitiveness. That right there is the basis for these very real currency wars.