How sadly history repeats. Remember  John Connolly’s (the then US Secretary of the Treasury) famous 1971 comment to European financial ministers: “The dollar is our currency, but your problem.”

G-7 will have its meeting this Friday in Washington. They will discuss the ongoing race to the bottom currency war issue that has been roiling the global economy over last couple of months. Call it by competitive devaluation of currencies or competitive nonappreciation of currencies, it essentially boils down to a falling dollar due to the ‘global currency’ status that dollar enjoys.

Can the G-7 face the following simple question in trying to find a simple feasible solution to the currency war?

Who started this currency war and how?

The problem with agencies like G-7 has been that they always miss the point and come out with an analysis that further damages the patient than cures the ailment.  They always live by the minute as they don’t have the patience nor the resources any more to look for a long-term sustainable solution. G-7 has routinely misinterpreted root cause of any problem over last couple of years, and mistook symptoms as root causes, more so when the root cause was due to faulty policies (excessive liquidity) from the U.S. G-7 also lacked any credibility to reprimand the untitled leader of the G-7, the U.S. itself. 

Whenever the U.S. has failed to play responsibly to its unique position in a global economy; G-7 has tried its best to find a scapegoat to the problem, or even have tried to scuttle the problem itself by letting the problem persist and magnify.

Just imagine had the U.S. been another nation, what could have happened to its economy post-2008 disaster? It would have fallen like the former USSR, if not more badly.

The world has been paying an extremely heavy price in its effort of letting the U.S. economy regain some of its old-time vitality. Alternatively the U.S. has been exploiting the present turmoil in global economy to its advantages by exporting inflation globally through a weaker global currency that it owns and prints shamelessly, the dollar.  

Probably both of above two have been running simultaneously for quite some time. One understands the pain and frustration of Japan, at the same time Japan is ready to feed the U.S. so that there’s market for Japanese products in the U.S.

At least China has been trying to develop untapped poorer markets across Africa and certain parts of Asia. China understands the unsustainability of the model where the U.S. consumer is at the center of the global demand; financed, however, by debt.

In spite of years of efforts from the World Bank, the U.S. or Europe, little progress could be made in generating consumption at the bottom of the pyramid in the poorer nations of the world. China has been trying to do so, and it surely would find a more sustainable market for its competitively cheaper manufacturing industries at the bottom of the pyramid than the U.S. consumer in coming years.

One needs to pump both money and goods to keep the demand high from the U.S. consumers as it has been the case with the U.S. economy. With the bottom of the pyramid, they would consume less individually, without credit and their numbers would make up more than the the short-falls from the lost demand from the U.S.

Can the G-7 face the question on who triggered this ongoing currency war? Although all the superficial blames point to China, accountability must be commensurate with the responsibility. Trillions of dollars of reserves are held by the developing nations. Yuan does not yet enjoy the status of a global currency even to a single digit percent point as dollar does.

If the U.S. fundamentally believes that China is the root cause of the problem, why not apply anti-dumping duty heavily against imports from China? A bi-lateral problem needs to be resolved bilaterally; and there’s no need to go for a global debasing of a global currency.

So the argument that dollar goes down as yuan has been deliberately undervalued is not acceptable, and is fundamentally flawed. (alternatively, the reason for not doing so may be an apprehension amongst the U.S. policy-makers on impact of such a decision on bi-lateral ties with China, more so from the point of China’s forex holdings).

The flow of the events of this currency war clearly highlight how the root cause of the currency war is linked with the market speculation of Quantitative Easing II (or QE III or IV or whatever as others suggest), to be launched by the Federal Reserves. Fed. has bolted the horses on that ‘market speculation’ cart, and now the cart is running amuck without any control. And it serves much of the purpose of QEII before it is launched!

Now one may further go down the root cause and ask what prompted the Fed. to decide to go for further stimulus or why did the U.S. went through the crisis more than the rest of the world to why the U.S. consumers don’t save or why the unemployment figure in the U.S. is high?

Do we need to revisit China as the root cause for all these troubles in the world’s largest economy?

However I am sure that G-7 or the IMF (or institutes affiliated with the U.S.) would point to China for all these sufferings of the U.S. economy.

Reminds me one of the famous Aesop’s fables, The wolf and the lamb. 

The U.S. merely presented an opportunity and China grabbed that opportunity. The U.S. thought itself invincible in making dollar a problem for the rest of the nations. No one had any idea how the opportunity may one day backfire against the U.S. itself. By pegging yuan to dollar, China makes dollar a problem to the U.S. as well.  

Some lighter words before the G-7 meeting begins on this complex issue.  May I please suggest (with all my humility) that policy-makers from G-7 read this poem, titled ‘the discovery of the shoes’ , of Tagore, before trying to find out solutions to the ongoing complex currency war. This may indeed lead to the discovery of a sustainable global financial system.

Rabindranath Tagore probably had an inkling on how complex problems can be solved with an open and unbiased mind. Today’s financial world badly needs one. We need someone from the main street background in telling the G-7 the importance of living within one’s means to solve this currency war.

A global currency does not come with the passport of exporting inflation alone, it also comes with its associated responsibilities.

I invite you to visit my blog, Wondering Man (or take a look at my book, Wondering Man, Money & Go(l)d at Google Books). You are also invited to join me on Twitter.

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