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Why a currency war could hurt you
A currency war sounds weirdly abstract, like a game played by rival politicians -- but it can have devastating effects in the real world. And it’s not all that different from a rivalry of different kind -- a hypothetical sibling rivalry.
Imagine a pair of brothers. They together own a honey-making business in Minnesota, just a few miles from the Canadian border. One day, the brothers have a fight, and decide they can’t work together anymore -- so they divide the company in two. The younger brother decides to take his half of the bees and move across the river to Canada.
Both businesses make the same honey, sold in an 8 oz. jar; priced the same, $1 per jar. When the fight happened and the brothers moved apart, the Canadian and U.S. dollars were at parity, so a jar of honey -- regardless of where it was made -- was worth both one U.S. dollar and one Canadian dollar. The younger brother sold his honey to his fellow Canadians, the older brother had the American market.
All goes well, until... CURRENCY WAR! The brothers wake up, and find that one Canadian dollar is now worth just 50 U.S. cents! Or, to put it another way, one U.S. dollar is worth two Canadian dollars.
Joe is an American who loves honey. He has one dollar. Usually he would just buy a jar of honey from the American honey company -- it’s closer, the honey tastes the same, why not buy American? But his single U.S. dollar will now buy him two Canadian dollars, with which he can buy two jars of Canadian honey.
The currency wars allow him to get two jars of honey for the price of one. This is great news for Joe, and all those Americans like him -- they all start buying up Canadian honey. It’s great news for foreigners, who also like a good deal. And it’s great news for the Canadian honey company, of course -- the cheap Canadian currency has allowed it to boost its share of the market.
But this is really bad news for the elder brother and his American honey company. He can’t afford to compete, not without watering his honey down or using imported bees or something else. Unless the government does something to weaken the U.S. dollar, he’s going to go out of business, which means he’ll have to lay off honey workers and sell off those bees.
And this will be happening all over the country, eroding America’s manufacturing base, accelerating unemployment and leaving all of us badly needing a drink.
I miss the old Paddy! There was nothing unique about this video from the many other economic "cartoons" on YouTube. I teach economics and offer students extra credit each semester to watch up to 10 Paddy's Whiteboards - but this won't hold their attention - we need the "personal Paddy" touch back! You are a good artist - draw for us on the spot!
Based on my understanding, the exchange rate change in the above example happens because the demand for Canadian dollars decreases in relationship to it's supply. This could have happened for many reasons: an overall increase in imports to Canada relative to its exports; Canada's central bank increased the monetary base (printed more Canadian dollars); Decrease in Canadian interest rates (increased credit availability from reduced consumption or decreased Canadian bank reserves). Now with a cheaper Canadian dollar, U.S. businesses are hurt and exports to Canada suffer. A currency war is basically where the U.S. government/FED "retaliate" by trying to weaken the U.S. dollar to stay in line with Canada's dollar. This can trigger a "race to the bottom" as several countries attempt to debase their currency for the benefit of their own industry base. The problems with a currency war are the side effects of weakening a currency: instigating inflation (robbing value from those who hold the currency) or encouraging banks to be more risky (a risk that's ultimately born by the tax payers).
This can all be prevented if there was a single international unit of account (currency) but for a long time, this would have required an international central bank that centrally controls the issuance of such currency. Not exactly a politically feasible (nor desirable, in my opinion) feat. But now there's BITCOIN. A completely decentralized, network-based open-source digital currency with extremely low international transaction costs, no centralized issuing authority and true scarcity. It's money over IP and ends the currency monopoly of central banks and the state.
