Guest Post: Currency Wars Are Trade Wars

Tyler Durden's picture


Submitted by John Aziz of Azizonomics blog,

Paul Krugman is all for currency wars, but not trade wars:

First of all, what people think they know about past currency wars isn’t actually true. Everyone uses some combination phrase like “protectionism and competitive devaluation” to describe the supposed vicious circle of the 1930s, but as Barry Eichengreen has pointed out many times, these really don’t go together. If country A and country B engage in a tit-for-tat of tariffs, the end result is restricted trade; if they each try to push their currency down, the end result is at worst to leave everyone back where they started.


And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930s this was because countries threw off their golden fetters — they left the gold standard and this freed them to pursue expansionary monetary policies. Today that’s not the issue; but what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct.

There is a serious intellectual error here, typical of much of the recent discussion of this issue. A currency war is by definition a low-level form of a trade war because currencies are internationally traded commodities. The intent (and there is much circumstantial evidence to suggest that Japan at least is acting with mercantilist intent, but that is another story for another day) is not relevant — currency depreciation is currency depreciation and still has the same effects on creditors and trade partners, whatever the claimed intent.

Krugman cites Barry Eichengreen as evidence that competitive devaluation does not necessarily mean a trade war, but Eichengreen does not address the issue of a trade war directly, much less denying the possibility of one.  Indeed, while broadly supportive of competitive devaluation Eichengreen notes that the process was “disorderly and disruptive”.

And the risks of disorder and disruption are still very real today.

As Mark Thoma noted in 2010:

While the positive effects a currency war produced in the 1930s are unlikely to reappear, there is a chance of large negative effects such as a simultaneous trade war or the breakdown of the international monetary system, so let’s hope a currency war can be avoided.

The mechanism here is very simple. Some countries — those with a lower domestic rate of inflation, like Japan — have a natural advantage in a currency war against countries with a higher domestic rate of inflation like Brazil and China. If one side runs out of leverage to debase their currency because of heightened domestic inflation, their next recourse is to resort to direction trade measures like quotas and tariffs.

And actually, the United States and China in particular have been engaging in a low-level trade and currency war for a long time.

As I noted last year:

China and Russia and Brazil have all recently expressed deep unease at America’s can-kicking and money-printing mentality. This is partly because American money printing has exported inflation to the world, as a result of the dollar’s role as the global reserve currency, and partly because these states already own a lot of American debt, and do not want to be paid off in hugely-debased money.

Since I made that statement, there has been a great lot of debasement without any great spiral of damaging trade measures. But with the world locked into ever greater monetary and trade interdependency, and with fiery trade rhetoric continuing to spew forth from the BRIC nations, who by-and-large seem to continue to believe that American money-printing is damaging their interests   — who in the past two years have put together a new global reserve currency framework — it would be deeply complacent to believe that the risks of a severe trade war have gone away.

(Unfortunately, Krugman and Eichengreen both seem to discount the reality that Okun’s law has broken down, and that monetary expansion today is supporting crony industries, and exacerbating income inequality, but those are another story for another day)

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Sat, 02/16/2013 - 21:17 | 3250534 NemoDeNovo
NemoDeNovo's picture

FUCK You Krugman you evil Fat Sycophant Elf Bastard

Sat, 02/16/2013 - 22:13 | 3250623 ISEEIT
ISEEIT's picture

aaaaaaaaaaaah..come on now. The Krugmiester is just playin' his role. You need to see what his kid does, actually pretty talented I guess. Please do be patient and watch for a few minutes??? Kruggies boy might turn out alright..Although the enjoyment in inciting crowd mania seems to be a genetic flaw shared by both Father and Son, Maybe the kid will put it to good use?

Sun, 02/17/2013 - 00:57 | 3250797 MrX
MrX's picture

I am introducing fiat doobies as the new international standard of exchange.


Sun, 02/17/2013 - 02:13 | 3250862 Daily Bail
Daily Bail's picture

The rumble in Keynestown.

WATCH: Ron Paul Vs. Paul Krugman

Sun, 02/17/2013 - 03:20 | 3250910 Enslavethechild...
EnslavethechildrenforBen's picture

Currency wars are class warfare taken to an extreme. You're all going to get fucked over royally. Bend over.

Sun, 02/17/2013 - 03:57 | 3250938 A Nanny Moose
A Nanny Moose's picture

There needs to be a Pop-Up Fallacy video on The Kruggybear.

Sun, 02/17/2013 - 10:17 | 3251113 Bicycles and Beer
Bicycles and Beer's picture

his son, its really a shame to hear.

Sun, 02/17/2013 - 16:08 | 3251643 piceridu
piceridu's picture

He has two cats...ok, that answers a lot of questions.

Sat, 02/16/2013 - 22:40 | 3250657 Dingleberry
Dingleberry's picture

According to Clausewitz, war is politics by other means. Currency manipulation is politics by other means as well, especially in the post-nuclear world.

Can't just be slinging random fucking bombs around like the good old days. 

Sun, 02/17/2013 - 00:28 | 3250787 sitenine
sitenine's picture

Same as it always was. At first, trade is lucrative, and we pay you. Second, we say 'fuck you' because we don't like the trade terms anymore. Lastly, we kill you and take what we want. Humans aren't that complicated, after all.

Sun, 02/17/2013 - 10:38 | 3251129 DaveyJones
DaveyJones's picture

so every city is Dresden

how humane

Sun, 02/17/2013 - 11:30 | 3251161 TheGardener
TheGardener's picture

Shame as it ever was. Dresden overwhelmed by refugees
that should not have been there in the first place unaccounted for after genocidal bombings.

Only counted to the last limb found in the rubble,
but those were Nazi counts that can`t be trusted because
they left records on every bullet fired and every soul
diminished by disciplinary action.

Sun, 02/17/2013 - 03:49 | 3250931 Seer
Seer's picture

Perhaps he's SHORT fiat?

What I don't get with all of this is that isn't it about our notion that fiat is pretty much worthless?  If so, then what's the problem with recognizing it as such via devaluation?  Remember: GOLD is the reference point; we here on ZH tend to believe that gold is "undervalued," which is really saying that fiat is overvalued.

The words coming out of the elf might be wrong, but it seems like the tone isn't so off base. (and no, this isn't in defense of him or any of the other minions of TPTB)

Sun, 02/17/2013 - 10:47 | 3251137 Remington IV
Remington IV's picture

Is that you ,  " Krugman-In-Wonderland " blogger .... ?????


Sat, 02/16/2013 - 21:30 | 3250549 LetThemEatRand
LetThemEatRand's picture

Currency wars are not having their 1930's effect (yet) because of the massive debt that preceded them.  In effect, America devalued its currency decades ago via low interest rates and non-existent lending standards.  It is not accidental that people with no income could buy a house for $500K.  Debt is no longer as easily acquired by individuals because of debt saturation and programs like TARP, so governments are trying to replace the debt with cash that is flowing to the top 1%.  Private debt is being converted to public debt (while the wealthy are pocketing the cash printed in the meantime).  Eventually all that cash infusion will catch up with debt deflation, and massive inflation for the masses will likely follow.

Sun, 02/17/2013 - 10:41 | 3251131 DaveyJones
DaveyJones's picture

your most important word is in the parentheses. Well said

Sat, 02/16/2013 - 21:30 | 3250555 EscapeKey
EscapeKey's picture

Krugman sucks big sloppy donkey cock.

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble

Mon, 02/18/2013 - 15:54 | 3253857 BigJim
BigJim's picture

Krugpot denies it today; says his words are 'taken out of context'.

What a mendacious little scumbag the man is.

Sat, 02/16/2013 - 21:33 | 3250560 ebworthen
ebworthen's picture

Now that the crony capitalist's of the U.S. have offshored so much employment what is left?  FED war!

Sat, 02/16/2013 - 21:35 | 3250562 Yen Cross
Yen Cross's picture

 This "tinderbox" is just [Discovery Channel] waiting for a breath of oxygen. Did you see the Butter Fly'

Sat, 02/16/2013 - 22:40 | 3250658 Stock Tips Inve...
Stock Tips Investment's picture

The existence of this war is taking place within a highly integrated market as financial. This would not do anything but generate large profit opportunities.

Sat, 02/16/2013 - 21:38 | 3250570 The Heart
Sun, 02/17/2013 - 03:31 | 3250914 Enslavethechild...
EnslavethechildrenforBen's picture

Jew cock suckers.

Sun, 02/17/2013 - 13:30 | 3251359 Marc To Market
Marc To Market's picture

How long will Zero Hedge tolerate and accept this racist slander?  Shame.  

Sun, 02/17/2013 - 13:50 | 3251401 Enslavethechild...
EnslavethechildrenforBen's picture

How long will the world tolerate global government by Jew Central Bankers?

Do you honestly believe the entire German population just suddenly decided to kill them because they wear stupid little hats?

Shame on usurous counterfeiting Jew Bankers.

You can blow me.

Mon, 02/18/2013 - 10:41 | 3252714 TruthInSunshine
TruthInSunshine's picture

There's a ton of sentiment and there are a copiuos amount of comments I don't agree with and/or often find offensive.

I believe 14 of my ancestries, 27 of my religions, 38 of my organizations, 55 of my philosophies & 109 of my dogmas have been sacked and pillaged with brutul venom at least once, and often many more times.

Someone even insulted my mother once.

If that's the price to be paid to be able to visit one of the few places remaining that comes closest to allowing freedom of speech, it's so miniscule a price to be paid as to be quite insignificant.

Mon, 02/18/2013 - 15:55 | 3253863 BigJim
BigJim's picture

I thought your mum was excellent!

Sat, 02/16/2013 - 21:48 | 3250584 q99x2
q99x2's picture

Here's another war. Banksters unleash sars virus on British population.

The World Health Organisation on Saturday urged countries to be vigilant over the spread of a potentially fatal SARS-like virus after a new case in Britain brought the global number to 12.

Sat, 02/16/2013 - 22:39 | 3250654 Bastiat
Bastiat's picture

" V "

Sat, 02/16/2013 - 21:53 | 3250590 PAWNMAN
PAWNMAN's picture

It's the epitome of ridiculous to see all these morons at the G20 claim that there is no currency war ongoing. Is there a Central Banker, anywhere in the world, with even an ounce of credibility remaing? What a bunch of lying, thieving assholes! They need to bring back the ritual of being tarred and feathered. With Mr. Bernanke as the first victim.

Sat, 02/16/2013 - 23:14 | 3250704 bigwhiffa
bigwhiffa's picture

Tarred and feathered? More like handcuffed and hung from a tree!

Sun, 02/17/2013 - 03:34 | 3250917 Enslavethechild...
EnslavethechildrenforBen's picture

Cut their limbs off and put em through a compost shredder.

Sat, 02/16/2013 - 21:55 | 3250594 Marc To Market
Marc To Market's picture

We tend to be more accepting and less critical of views that we happen to agree with.  Are there testable hypotheses here or is stringing one assertion after another ?  It is another example of every thing we find bad in the world put at the US feet.  The currency wars are the US fault because it pursued unorthodox monetary policy to address the financial crisis at home and the economic fall out, which includes low inflation and low growth and high unemployment.  Please....

The fact that some countries who enjoy trade and current account surpluses refuse to allow their currencies to appreciate very much--not only China and many countries in East Asia but also the Middle East is that part of the currency wars ?  In my experience, of all the things that move the nearly $4 trillion a day fx market, policy makers wishes and verbosity tend not to rank very high--yet this is the realm in which the currency war is being fought.

Lastly, a more compelling argument, if that is what this post is, would include addressing counter evidence--such as increased bilateral trade deals and negotiations, including the US-EU, the Trans-Pacific Partnership, the EU-Canada, the EU-Singapore, the EU-Japan, suggesting that the so-called currency wars are not translating to trade wars.  

The yen has only begun falling in the last six months.  It has been pursuing QE for a nearly a decade.  Sterling made new multi-month highs in Dec before falling 5-6% this year, well after the end of the BOE's gilt purchases.  

Sloppy thinking, leads to shoddy analysis, weak understanding of the world, and poor investment insight.   

Sat, 02/16/2013 - 23:37 | 3250729 LetThemEatRand
LetThemEatRand's picture

Everything you say would make sense IF the dollar were not the world reserve currency.  But it is.

Sun, 02/17/2013 - 00:58 | 3250809 Yen Cross
Yen Cross's picture

 Yen likes rand. I'm hedged against some rand.

Sun, 02/17/2013 - 01:47 | 3250847 in4mayshun
in4mayshun's picture

Everything that Marc To Market said would make sense if it wasn't irrelevant as to why Fed, the USGov, and their useful idiots like Krugman are traitorous criminal bastards who shoul be in prison.

Sun, 02/17/2013 - 03:39 | 3250921 Enslavethechild...
EnslavethechildrenforBen's picture

With Bubba and his friends.

Sun, 02/17/2013 - 11:56 | 3251208 TheGardener
TheGardener's picture

He said :"The fact that some countries who enjoy trade and current account surpluses refuse to allow their currencies to appreciate very much" Fuck if you take this for a fact what did he say that makes sense ?
"Me reserve currency man from the hood, making shoddy small
arms that sell all to well domestically , me no fail "

South China gold yuan or golden Reichsmark should yield
to a hyperpowers non-existent claim to somehow hand over
all assets for "due clearing " ?

Sun, 02/17/2013 - 12:09 | 3251228 overmedicatedun...
overmedicatedundersexed's picture

Tariff’s seem to be nasty only for the people of the USA. Every economist from krugman to our austrian school all maintain free trade (impacted by currency value of course, devalue for advantage) is very very good and tariff is very very bad.

Well in todays actual world we have tariffs in USA of approximately, for imported autos ,of less than 2% while the EU places a 16% tariff on USA produced cars..yet the EU is all for America having a free trade policy, but not them it seems, one could conclude that the free trade lobby may benefit from unilateral free trade, for us .I maintain (not a PHD economic pro) that free trade has been a weapon against the economic health of my country. (USA) and recent trends in jobs and exports support this. The powerful multi national banks and companies are the winners as well as the NWO one world .gov types, who would a known?

Sun, 02/17/2013 - 14:06 | 3251449 TheGardener
TheGardener's picture

The US has no real trade relations left, it`s the sad truth.

Mercantile trade distortions on unspeakable US-sponsored EU laws like making parallel imports as much a crime as importing counterfeit goods (!!!!) has the handwriting and lobbyist wringing of US multinationals . Their criminal
business distortion models as in printers at cost but
ink at 800% profit are perfectly legal in Europe, thanks
to excessive lobbying. When in fact all the crime syndicate
leaders and their executives should have been arrested
long ago. Monopoly commissions being rendered toothless
long ago, it is now perfectly legal to sell ink cartridges that got sourced for 20 cents at the Asian OEM for 40 dollars within a monopoly brand authorized distribution.

Free enterprise/trade anyone ? The answer to such excessive
mercantilism is barricades !

Sun, 02/17/2013 - 10:46 | 3251135 DaveyJones
DaveyJones's picture

your view presumes a number of things as well, mainly an equal playing field. Ultimately our strategies will backfire hard, but the US shares a lot of the responsibility

Sat, 02/16/2013 - 22:04 | 3250607 Shell Game
Shell Game's picture

I am speechless after reading Krugman's and the Atlantic's drivel.  People pay a high price for not digging deeper than for what they want to hear..

Sat, 02/16/2013 - 22:09 | 3250617 Hedgetard55
Hedgetard55's picture

He is a shit for brains lefturd cocksucker and at least the average ZH reader understands that. Make no mistake though, this lying fuck is well paid for his propaganda.

Sat, 02/16/2013 - 22:11 | 3250620 Sean7k
Sean7k's picture

It is neither a currency nor trade war. Since all central banks collude to manage the debt environment, the real purpose is to limit labor costs for production and concentrate revenues to a select few people. 

Having people think they have a dog in this hunt is just laughable. Taxes and fees reduce the value of your labor and steal your ability to effect the market and where you wish to invest your wealth. 

It is theft and monetary sterilization in one easy operation. All currencies are crap. Your desire to become wealthy is all they need to maintain the status quo. The common people will do what they're told, but the capable ones might question the process. Luckily, they are easily bought off- sex, drugs, nice homes, expensive meals: your contributions to tyranny are a measure of your worth to our overlords. 

We cannot fight this system, because we neither understand it nor have any control over it. They have put it in the hands of "the people" and called it democracy. You cannot convince a captive population of animals fed and cared for in a manner where they believe they are well off. 

We can only abandon it and refuse to participate. You can't run- they're everywhere. 

Sat, 02/16/2013 - 23:01 | 3250684 kito
kito's picture

Agreed, the idea that there is a currency war is ridiculous...bernanke giving billions to european banks, the cbs stepping in to manipulate the yen when needed.....rickards is a jakass......central planning is exactly that....pulling the strings of all currencies in a synchronized fashion....

Sun, 02/17/2013 - 03:43 | 3250924 Enslavethechild...
EnslavethechildrenforBen's picture

The currency war is real.

You're an idiot.

Sun, 02/17/2013 - 09:38 | 3251085 kito
kito's picture

I'm assuming the sarc button was on

Sun, 02/17/2013 - 10:03 | 3251104 ParkAveFlasher
ParkAveFlasher's picture

I think you put too much faith in the ability of tptb to collude.  There is always a joker in the deck, someone who wants more than what's allotted.  Carnivores will turn on each other under the right conditions.  Besides, you can dope the currency all you want, but you can't make producers individually accede to producing at a loss.  All the Krugmanites and liquidity junkies are high as kites at the moment.  Ben just printed.  That high will wear off and the junkies will turn back to hungry hungry hippos for real goods with real value but there will be none to have.  You wouldn't have guessed at the happywild party the night before a crackhouse murder that the inhabitants would have shot each other over missing cigarettes.

Sun, 02/17/2013 - 11:32 | 3251177 kito
kito's picture

Really??? Central banks dont collude?? Tyler hasn't shown time and time again the uncanny synchronization of the currency faucets turned on?? Cbs dont engage in gold swaps?? After japans tsunami, the cbs didnt come together to support the yen?? Are you kidding me? The euro isnt being propped up??????There are no currency wars, and you are a dumbass for believing otherwise....

Sun, 02/17/2013 - 16:08 | 3251634 ParkAveFlasher
ParkAveFlasher's picture

There is collusion among banks, not among every single firm producing every single good on earth.  If the trade war won't be fought among governments, they will be fought among private firms, or by quality going galt.  In that case, the war is internal between a nation's government and her firms, or internecine, whereby commerce and finance/government engage in dysfunctional relationships which can only go on until it can't. 

Why not throw yourself off the GWB if its all so hopeless?  Really man.  Go cry in your beer.  fuckin Jersey.  (I'm from Jersey, so I can say that.)

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