World Spins Closer to a Currency War

The world may be headed for a currency war after IMF talks ended without resolution Saturday.Global finance leaders failed Saturday to resolve deep differences that threaten the outbreak of a full-blown currency war.

Various nations are seeking to devalue their currencies as a way to boost exports and jobs during hard economic times. The concern is that such efforts could trigger a repeat of the trade wars that contributed to the Great Depression of the 1930s as country after country raises protectionist barriers to imported goods.

The International Monetary Fund wrapped up two days of talks with a communique that pledged to "deepen" its work in the area of currency movements, including conducting studies on the issue.

The communique essentially papered-over sharp differences on currency policies between China and the United States.

U.S. Putting Pressure on China

The Obama administration, facing November elections where high U.S. unemployment will be a top issue, has been ratcheting up pressure on China to move more quickly to allow its currency to rise in value against the dollar.

American manufacturers contend the Chinese yuan is undervalued by as much as 40 percent and this has cost millions of U.S. manufacturing jobs by making Chinese goods cheaper in the United States and U.S. products more expensive in China.

China has allowed its currency, the yuan, to rise in value by about 2.3 percent since announcing in June that it would introduce a more flexible exchange rate. Most of that increase has come in recent weeks after the U.S. House passed tough legislation to impose economic sanctions on countries found to be manipulating their currencies.

Egyptian Finance Minister Youssef Boutros-Ghali told reporters Saturday at a concluding news conference that there were "a number of points of friction" at the meetings. But he said it was a significant achievement that all countries recognized the central role the IMF should play in trying to resolve currency conflicts.

IMF Managing Director Dominique Strauss-Kahn said he did not view the outcome of the discussions as a failure. He said they set the stage for further progress at the upcoming summit of leaders of the Group of 20 nations in November in Seoul and at future IMF meetings.

G-20 'Remains Committed' to Balanced Growth

Strauss-Kahn said the G-20 countries remained committed to the goals they established a year ago of achieving more balanced global growth and that this will require changes in currency policies.

The G-20 includes traditional economic powers such as the United States and Europe along with fast-growing economies such as China, Brazil and India.

"I am not disappointed," Strauss-Kahn told reporters about the outcome of the two days of talks. "We can talk and talk and talk. What we need is real action. I don't believe this action can be done except in a cooperative way."

Strauss-Kahn acknowledged that significant differences also remained on the question of reforming the IMF by giving China and other fast-growing economic powers greater voting rights and representation on the IMF board. The G-20 leaders are supposed to endorse a deal on IMF reform at their Nov. 11-12 summit.

Treasury Secretary Timothy Geithner on Wednesday raised the possibility that awarding greater power to China in the IMF should be linked to a greater willingness of that country to reform its currency system.

Strauss-Kahn said this comment was not a form of blackmail but rather acknowledgment that as countries grow more important economically, they mush bear greater responsibility for the proper functioning of the global economy.


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avdltd

Certainly, if the chinese re-evaluate their currency, unemployment and social unrest in China will ensue. But the rest of the world will suffer the same fate if they don't. Industrialism has become so efficient that only a fraction of the population is needed to produce everything everyone needs. How do you employ the rest? All nations want to export their way out of this mess, but exports pre-supposes an importer! Why import when all your needs can be met with goods produced domestically? To make matters worse, we are running out of all natural resources needed. It's a mess, and I don't see any way out of this. God help us!

October 10 2010 at 11:30 PM Report abuse rate up rate down Reply
itacurubi

Krugman and other liberal economists think that we should face down the Chinese on the exchange rate right now. Those who disagree with forcing a Chinese devaluation are mainly Republicans and Tea Partiers who want a "strong dollar"because ... well, who knows? Perhaps they find the word "strong" emotionally satisfying.

October 10 2010 at 12:04 PM Report abuse rate up rate down Reply
1 reply to itacurubi's comment
itacurubi

Oops! I ought to of course have said: "Chinese revaluation."

October 10 2010 at 12:05 PM Report abuse rate up rate down Reply
marine1942

This will not happen because we elected Obama our president and really, president of the entire world. He is going to unite us. All countries will love us. Ah, where is Paul McCartny ? The world knows the USA is sick--Obama tells them this. And the USA is sorry for the evil way we acted before Obama became the savior. Everything is beautiful in the world, join hands, socialist brothers & sisters

October 10 2010 at 8:50 AM Report abuse +1 rate up rate down Reply
frank1946

American companies just want to raise China prices then American prices in the wake of the Chinese inflation in currency values......if you cannot get pricing power in the market then go raise your competitors price which then allows you to finally raise your price. Unions love this drama, beats trade/tarriff barriers since there is little or no political risk involved.

October 09 2010 at 5:38 PM Report abuse +4 rate up rate down Reply
1 reply to frank1946's comment
avdltd

By undervaluing the yuan, the Chinese, in effect already have trade barriers! I do manufacture in China and believe me, the yuan is is WAY undervalued. I would like nothing more than to manufacure here in te US, but it is simply no way. A Chinese factory worker makes $150.00 a month, but lives like an Amenrican making $1,500.00! That tells me that their currencey is WASTLY undervalued!

October 10 2010 at 11:13 PM Report abuse rate up rate down Reply