GROUP 1

RESEARCH PAPER
CURRENCY WARS

AMIT JOSHI, AJEET KUMAR, ANANT NEGI, SHWETA GOPIKA

CHOPRA

The contents include the meaning, reason and the effects of the currency wars.
TABLE OF CONTENTS
SNO. TOPIC PAGE NO.

1 EXECUTIVE SUMMARY 3

2 INTRODUCTION 5

3 OBJECTIVES AND 7
METHODOOGY

4 FINDINGS 8

5 CONCLUSION 16

6 BIBLIOGRAPHY 18

7 REFERENCES 18
1. EXECUTIVE SUMMARY
A "currency war" is more of a political than an economic condition. Governments
frequently intervene in their currency markets, increasing the money supply to stimulate
trade and reduce unemployment, or decreasing the supply to combat inflation. The
problem is that in an interlinked global economy, currencies don't rise or fall in a
vacuum. Hence the need to investigate the current travails of the US economy and the
response of the Chinese and the US administration is of high importance. Unlike real
wars, currency wars don't have defined start dates, but they can be ended with something
like peace treaties.

Hence the research report thee by discusses the role play of the Chinese and the US
counterparts in elevating the condition of the currency wars. The research also states the
importance, reasons, initiators, culprits and the effects of the currency wars.

Probably solutions by devising special vehicles have also been stated there with in.
2. INTRODUCTION

Currency policies are a particularly hot topic because the United States can no longer try two
traditional remedies for a sluggish economy: government spending, because the political tide has
turned against it; and lower short-term interest rates, because they’re already effectively at zero.

As a result, the Federal Reserve announced a new round of quantitative easing, in which the
government puts cash into circulation by buying back its own bonds. Intended to encourage
business activity, the move could also drive down the dollar. But that should actually boost the
U.S. economy: a weaker dollar would make U.S. products more affordable globally, increasing
U.S. exports, income and employment.

Because the Chinese yuan is undervalued, as a July report by the International Monetary Fund
concluded, it allows China to be a net exporter of goods. Experts believe that China’s
government engineers this by using yuan to buy foreign currencies; this puts more yuan in
circulation and keeps down its value. In June, China announced it was resuming a "flexible"
currency policy, letting the yuan float on world markets, as the dollar does; but the yuan has
barely risen since then. Meanwhile, a potentially weaker dollar affects the United States’
interactions with many other countries.

After all, a lower dollar hurts exports from Europe, too-If the euro starts to appreciate relative to
the dollar, it is more difficult for Germany and the other Euro-Zone countries to compete in
world markets. However the German officials have already lambasted the new round of U.S.
quantitative easing-It’s inconsistent for the Americans to accuse the Chinese of manipulating
exchange rates and then to artificially depress the dollar exchange rate by printing money- said
German finance minister Wolfgang Schauble.

American policies also affect developing countries, especially in South America and Asia. The
low interest rates in the U.S., and low returns on U.S. bonds mean that investors looking for
better opportunities have been pouring money into emerging markets, which are generally
growing faster than advanced economies. But investors must make purchases — whether for
stocks, bonds or real estate — in local currencies. That increases demand for those currencies,
raising their values and making it harder for the issuing countries to export goods, slowing their
growth.

Officials in developing countries dislike a declining dollar; it was Brazil’s finance minister,
Guido Mantega, who declared in September that an “international currency war” was breaking
out. “These countries with emerging markets are also trying to adjust to the global economic
contraction,” notes Singer. "They want competitive exports, and they’re seeing the value of their
currencies appreciating with all this capital flowing in.”

Some developing countries combat demand for their currencies by imposing capital controls,
such as taxes on bonds, on foreign investment. But why don’t all emerging-market countries
intervene directly in currency markets, like China? A few countries do, actually. But printing
more currency to sell on exchange markets has a potential downside: inflation.

“Inflation is the trade off that the Chinese face in keeping their currency artificially depreciated,”
says Singer. However, the Chinese government has more political insulation from the
consequences of inflation than their counterparts in democratic countries, he adds. “Most of the
Latin American countries have histories of bad bouts with inflation. They know it can bring
down a government and wipe out middle-class savings.” Those countries, as well as the U.S.,
Germany and some other European states, are “more wary of inflation than are some of the
Asian countries.” So they tend not to print money to lower their currency values.

How the currency disputes will unfold is hard to forecast. But they do make clear how
international tensions can arise when states seek to protect their own interests in a deeply
globalized economy.
3. OBJECTIVES AND METHODOLOGY
3.1 OBJECTIVES:

The objective of the research paper is to investigate the following:

 The meaning of currency wars

 The causes of the currency wars
 The culprits/initiators of the currency wars
 The effects of the currency wars

3.2 METHODOLOGY:

Since the topic is current and is if high international attention the material used for research and a
analysis is the news reports, blogs of eminent international economists, former IMF associates
and printed newspaper editorial articles.

Both the Indian and the international aspects have been taken into consideration.

Hence only the information related to currency wars, quantitative easing and market
manipulation were taken into consideration. Hence the information was chosen selective and was
filtered.

Around 5 news reports and articles were taken into consideration for the research analysis.

Hence the research was Descriptive in nature and the information chosen for analysis was
judgmental and random.

Hence here the opinions and the surveys stated in the articles were taken as the basis for the
report.
4. FINDINGS
4.1 REASONS FOR CURRENCY WARS :

A "currency war" is more of a political than an economic condition. Governments

frequently intervene in their currency markets, increasing the money supply to stimulate
trade and reduce unemployment, or decreasing the supply to combat inflation. The
problem is that in an interlinked global economy, currencies don't rise or fall in a
vacuum.

When China keeps the yuan artificially low versus the U.S. dollar, it keeps the cost of
Chinese goods low in the United States, contributing to a trade imbalance. That provides
a steep incentive for the United States to retaliate by lowering its currency as well. Of
course, becuase two countries can only have one exchange rate, this race to the bottom
isn't likely to benefit either party.

When many countries devalue their currencies at the same time in an effort to make their
exports more competitive, it forces other countries -- Brazil for instance -- to join in to
prevent their currencies from rising. Countries often see currency wars as a zero-sum
game -- one wins and the others lose. But the widespread devaluation can have a
devastating effect on all.
Unstable exchange rates can deter international investment, slowing the pace of global
economic recovery. And of course, currency wars can have secondary political effects.
When countries are fighting over currency, they're less likely to agree to bilateral trade.
Additionally, currency pressures could make China less likely to go along with U.S.
efforts to contain Iran or North Korea.
Responding to Japan's unilateral intervention to weaken the yen, followed by similar
moves from Colombia, Thailand, South Korea, and other countries, along with the
international economists have speculated the existence of the currency wars.
Brazilian Finance Minister Guido Mantega recently declared that the world is "in the
midst of an international currency war." In an effort to recover from the global economic
crisis, these countries are attempting to stimulate their exports by making their currencies
cheaper.
 These efforts add to the longstanding tensions between Western nations and China over
the latter's monetary policy, which many say keeps the yuan artificially low.
IMF Managing Director Dominique Strauss-Kahn, among others, has also warned against
countries using currencies as "policy weapons." French Finance Minister Christine
Lagarde has urged countries to talk about "peace and not war." But U.S. Treasury
Secretary Timothy Geithner has denied that there's a currency war going on and says
there's "no risk" of one breaking out.

4.2 HISTORY OF CURRENCY WARS:

Unlike real wars, currency wars don't have defined start dates, but they can be ended with
something like peace treaties.
In 1936, Britain, France, the United States signed the Tripartite Agreement to address the
currency imbalances that had resulted from Britain and the United States leaving the gold
standard in the midst of the Great Depression. On the eve of World War II, with an even
greater enemy on the horizon, the three countries agreed to refrain from devaluing their
currencies.
In 1985, when Japan not China was the rising Asian economic power,  the governments
of Britain, France, Japan, the United States, West Germany signed the Plaza Accord,
under which the dollar would be allowed to depreciate against the yen.

Some are now calling for a new international agreement to stabilize the current round of
depreciation. But, obviously, the world economy has changed quite a bit in the last 25
years. The growing power of emerging economies such as Brazil, China, India, and South
Korea make it much harder for a few finance ministers in a hotel room to hammer out a
deal. Moreover, previous efforts at stabilizing global exchange rates have caused the
parties involved to lose faith when they're ultimately undermined by domestic policies.

4.3 CULPRITS/INITIATORS OF CURRENCY WARS:

The main culprit in this conventional view is China, although the International Monetary
Fund is a close second. But, considered more broadly, the seriousness of today’s situation
is primarily due to Europe’s refusal to reform global economic governance, compounded
by years of political mismanagement and self-deception in the United States.

China certainly bears some responsibility. Partly by design and partly by chance, about a
decade ago China found itself consistently accumulating large amounts of foreign
reserves by running a trade surplus and intervening to buy up the dollars that this
generated. In most countries, such intervention would tend to push up inflation, because
the central bank issues local currency in return for dollars. But, because the Chinese
financial system remains tightly controlled and the options for investors are very limited,
the usual inflationary consequences have not followed.

This gives China the unprecedented – for a large trading country – ability to accumulate
foreign-exchange reserves (now approaching $3 trillion). Its current-account surplus
peaked, before the financial crisis of 2008, at around 11% of GDP. And its export lobby
is fighting fiercely to keep the exchange rate roughly where it is relative to the dollar.

In principle, the IMF is supposed to press countries with undervalued exchange rates to
let their currencies appreciate. The rhetoric from the Fund has been ambitious, including
at the recently concluded annual meeting of its shareholders – the world’s central banks
and finance ministries – in Washington. But the reality is that the IMF has no power over
China (or any other country with a current-account surplus); the final communiqué last
weekend was arguably the lamest on record.
Unfortunately, the IMF is guilty of more than hubris. Its handling of the Asian financial
crisis in 1997-1998 severely antagonized leading middle-income emerging-market
countries – and they still believe that the Fund does not have their interests at heart. Here,
the West Europeans play a major role, because they are greatly overrepresented on the
IMF’s executive board and, despite all entreaties, simply refuse to consolidate their seats
in order to give emerging markets significantly more influence.

As a result, emerging-market countries, aiming to ensure that they avoid needing

financial support from the IMF in the foreseeable future, are increasingly following
China’s lead and trying to ensure that they, too, run current-account surpluses. In
practice, this means fervent efforts to prevent their currencies from appreciating in value.
But a great deal of responsibility for today’s global economic dangers rests with the US,
for three reasons.

 First, most emerging markets feel their currencies pressed to appreciate by

growing capital inflows. Investors in Brazil are being offered yields around 11%,
while similar credit risks in the US are paying no more than 2-3%. To many, this
looks like a one-way bet. Moreover, US rates are likely to stay low, because
America’s financial system blew itself up so completely (with help from
European banks), and because low rates remain, for domestic reasons, part of the
post-crisis policy mix.
 Second, the US has run record current-account deficits over the past decade, as
the political elite – Republican and Democrats alike – became increasingly
comfortable with overconsumption. These deficits facilitate the surpluses that
emerging markets such as China want to run – the world’s current accounts add
up to zero, so if one large set of countries wants to run a surplus, someone big
needs to run a deficit.

Leading Bush administration officials used to talk of the US current-account

deficit being a “gift” to the outside world. But, honestly, the US has been over
consuming – living far beyond its means – for the past decade. The idea that tax
cuts would lead to productivity gains and would pay for themselves (and fix the
budget) has proved entirely illusory.

 Third, the net flow of capital is from emerging markets to the US – this is what it
means to have current-account surpluses in emerging markets and a deficit in the
US. But the gross flow of capital is from emerging market to emerging market,
through big banks now implicitly backed by the state in both the US and Europe.
From the perspective of international investors, banks that are “too big to fail” are
the perfect places to park their reserves – as long as the sovereign in question
remains solvent.
 When a similar issued emerged in the 1970’s – the so-called “recycling of oil surpluses”
– banks in Western financial centers extended loans to Latin America, communist
Poland, and communist Romania. That was not a good idea, as it led to a massive (for the
time) debt crisis in 1982.

We are now heading for something similar, but on a larger scale. The banks and other
financial players have every incentive to load up on risk as we head into the cycle; they
get the upside (Wall Street compensation this year is set to break records again) and the
downside goes to taxpayers.

The “currency wars” themselves are merely a skirmish. The big problem is that the core
of the world’s financial system has become unstable, and reckless risk-taking will once
again lead to great collateral damage.

4.4 CURRENCY WARS, MARKET MANIPULATION AND QUANTITATIVE EASING:

One thing the weaker dollar has done is make exports cheaper for transnational
conglomerates and that has helped the market along with these companies repurchasing
their stock in the market. In spite of these subsidies the market in the United States seems
not to have improved at the rate it should have been. This is speculated that it is probably
because of the off again, on again, of quantitative easing.

Half of the Federal Reserve members say -let’s do it and the other half says do not. At
this point we can assume that the decisions have been made-The US Feds have
discounted an injection of $500 billion. In addition, they know long-term interest rates
are headed lower, although a reduction in the ten year T-note of ½% to 1% is not going to
change things much. It will only provide a comfort zone and make big corporations more
profits. We do not believe it will have a big influence on home buying with the mortgage
scandal in process, which could drag on for years.

While this transpires and international business tightens, exporters all want cheap
currencies, that has caused neglect of the dollar by the fed and Treasury and their antics
have put the foreign exchange market into disarray. This in part has caused consumer
confidence to fall generally worldwide. We see no end in sight and from our point of
view this is part of a global trade war as greed distorts rational thinking. It had to come
and it will benefit the US in time.

You have China increasing aggregates at a 20% rate to cheapen the Yuan for trade
purposes. If China does not cease and desist their policies will definitely lead to trade war
as everyone else follows. In order to solve these currencies, trade and tariff
problems, all these nations have to meet and agree on revaluation, devaluation and
debt default settlement. If that doesn’t happen the entire system is going to break
down.

QUANTITATIVE EASING ASPECT- This is why gold, silver and commodities make
sense in this negative environment. Where else can you go that is safe, as countries are
most all developing beggar-thy-neighbor policies? We must say the eurozone has
refrained from quantitative easing, but how long can that last? The euro just rose from
$1.19 to $1.40, and the 12% to 15% price advantage for exports is in good part gone.
Germany and other members will continue to see falling exports and that will put great
pressure on the ECB to loosen up and perhaps to reduce interest rates. We are seeing one
reflationary cycle after another in most nations and that does not solve the problems. We
have seen that in the US with the Bush stimulus, then QE1. That is why QE2 is futile. All
it does is enable higher gold, silver and commodity prices. The gold and silver markets
have been a lock since June of 2000, or for 10 years.

Compounded annual gains of almost 20% a year. These kinds of profits have existed
nowhere else over that period. In fact nothing comes close and it is going to continue.
What you are seeing is classical economics at play. Not only are they an inflationary,
hyperinflationary and deflationary depression play, but they are as well the ultimate
currency play. The only entity or currency that has no debt or encumbrances.

Psychologically the new mortgage gate scandal will put a damper on home and
commercial real estate sales in the US. Recent G-20 meetings have produced little in the
way of solutions on trade and foreign exchange. Derivatives are not even discussed.
Protectionism is being forced on nations by greedy nations, as most all unilaterally act in
their own interest. They believe they can continue to get away with what they have been
getting away with for years. The US and Europe cannot simply look the other way
anymore. This as Keynesians all trip over themselves and the fascist economic model.
Nations cannot make people buy things and they are pulling their financial horns in
worldwide. That means all that money and credit created does not go into plant,
equipment and research, or consumerism. It ends up in speculative markets. It serves to
beat off inflation, but it creates nothing, especially jobs and consumption. The insiders,
insider Goldman Sachs, say the economic scenario is fairly bad and very bad. Does it get
any simpler than that?

We see totally surreal markets, because the US government has been manipulating them
under the fascist model for years As in 1984, good news is bad and bad news is good.

MARKET MANIPULATION-Market manipulation is insanity and it guarantees a

dreadful conclusion. There is no logic and the denizens of Wall Street go right along with
the scam least they lose their jobs. Most all of the economic and financial news is bad and
that is a fact. Markets cannot thrive on hope in the Fed or the administration or on QE2.
The fundamentals simply are not there. Zero interest rates cannot last forever and neither
can a never-ending, growing Fed balance sheet. How can you have faith in a failed
system driven by the greed and looting of the American public by Wall Street and
banking, which owns the Fed? In fact we now see them praying for inflation so their
system doesn’t collapse. They really believe they can propagandize the public into
spending more again. That is going to be a very hard sell with real unemployment at 22-
3/4% and real estate still collapsing. In June, the banks began to try to lend to the better
quality, small and medium sized businesses. Thus far it has been a failure. In fact there is
no upturn, or recovery, in sight.

All the Fed is doing is creating another asset bubble in the face of mark-to-model and the
carrying of two sets of books by major corporations, especially in Wall Street and
banking. That means the downside risks are still latently present. What does Wall Street
say about 30% of unemployed have been out of work for more than a year and 40% have
been out for more than six months? The projection is 11 million homeowners are going to
lose their homes unless government offers an effective modification program. How do
you get 42 million people off of food stamps? Can the health care bill be reversed? We
hope so, but we do not think so. Corporate America and banking have close to $5 trillion,
but they are reluctant to spend it or lend it. This looks like a blind alley to us.

The kick off of QE2 began with the purchase of long-dated bonds. That plan we are told
has a $500 billion price tag for openers. As we explained in an earlier issue the Fed will
have to buy $1 trillion to $1.5 trillion in bonds. That should easily take the 10-year T-note
down to 1.5%. This is an accepted fact on Wall Street and has already been discounted in
the market. Profit growth is receding and costs are rising for corporate America. If they
lay off any more people they won’t be able to function.

The dollar falls foreign goods become more expensive in America and that fuels
inflation. In addition commodity prices are rising at a very quick rate fueling further price
inflation. These competitive devaluations aid as well the upward movement of gold and
silver.

Historically the investments that gain in price and stature during currency wars and with
the imposition of trade tariffs are gold, silver, platinum and palladium. Commodities gain
as well in the flight to quality.
5. CONCLUSION:
If the US and China persist with their present policy stances, there could be currency
wars and possibly trade wars and associated disruption of the global economy, depressing
growth all over including India. The solution is for the US and China to cooperate at a
reform like the G20 and strike a good bargain.

Washington needs jobs, restoration of confidence and some accommodative remedial

actions by foreign governments. Beijing needs to show defiance of external pressure and
lots of space to gradually shift the source of demand for Chinese produce from the rest of
the world to China itself.

The elementary Keynesian insight in a situation like in the US, of a crisis of confidence
keeping the economy in thrall is that the government must initiate action that would
generate jobs, incomes and demand, leading on to private sector investment. Investment
in High Tech Infrastructure and non tradable services is the only kind of stimulus that
will not leak away to lower cost suppliers in other countries.

But developed country debt is already so high that further government borrowing withers
rather than boosts business confidence. Nor is mere lowering of interest rates sufficient to
restore confidence.

Quantitative easing is seen as postponing the problem, only to make it bigger.

So, how can the US government fund investment in High tech infrastructure such as
smart grids, fast trains and universal broad band without borrowing? How can the federal
government prevent cash strapped state and local governments from laying off teachers
and healthy workers by droves, hiking the jobless count and eroding long term
competitiveness? Get the Chinese to fund it!

Create a SPV- Special Purpose vehicle to which the Chinese would contribute the bulk of
the capital but as preferred stock with no voting rights.

The rest of the capital could come from the big American banks that are now once again
paying their managers big bonuses. Gentle hint about withdrawing the current suspension
of the mark to market rule that allows the banks to value their assets at profit and bonus
generating levels should persuade bankers to do their duty to the flag and the country.
The SPV could then invest in specific companies to build specific kinds of infrastructure,
and to finance the state and local governments.

Why should the Chinese oblige? The pressure would be off to revalue Yuan and
rebalance the world by the next meeting of the G20; they avoid disruption of export
industries at a trade war and in general would come out smelling of roses. Sure there is
investment risk but the Chinese atre used to sovereign wealth investing. In the present
instance they might not own the infrastructure assets created but the superior financial
returns as compared to investing in US treasuries would be a bonus.
6. BIBLIOGRAPHY:

 For a bargain at G20 – 21st October 2010, Economics times, editorial page, TK Arun.
 Get real, Rupee Comes of Age, Economics Times, Editorial Page, Economics Times,
John Samuel Raja D, 13th October 2010.
 Posturing does not a policy make, Economics Times, Editorial Page, Saumitra
Chaudhari.
 The situation ahead, Gordan long, international economist , blog spot.

7. REFERENCES:

 Explained Currency Wars: November 15, 2010 By Peter Dizikes, MIT News
 Currency Wars, Market Manipulation and Quantitative Easing by Bob Chapman,
Global Research, October 20, 2010
 The hopeful science, Simon Johnson, a former chief economist of the IMF, 13th
October 2010.
 Why do currency wars start? Joshua E. Keating , October 14, 2010