Currency Wars
When countries generate a surplus, they will add to sovereign wealth funds (SWFs) which act as investment vehicles to pursue further gains. Generally, the goal is to create a diversified portfolio of investments from around the world. While that is mostly the case, SWFs often serve political purposes through vanity investments to implicitly support nations, supply bailout money, or serve as a means for strategic manipulation and IP theft.
Devaluing of a currency can be beneficial insofar as it increases the amount of exports a country makes, which increases the nation’s GDP to build a surplus or pay off debts. If your currency falls, the goods denominated in that currency are worth less to other nations thereby increasing demand, which increases job growth in the nation with the devaluing currency to satisfy the newfound demand. However, the devaluing of the currency also increases input costs for those exports to be produced, especially in a global economy where many parts or processes are outsourced to other nations.
The Federal Reserve was created in response to the liquidity crisis following the great San Francisco earthquake of 1906 and the run on the banks in 1907 related to the Knickerbocker crisis. When the trust attempted to corner the copper market, they failed, lost the money the banks lent them, and sparked widespread fear that drove a massive run on banks at a time when liquidity was all dried up.
The first modern day currency war took place when Germany attempted to devalue its currency to combat reparation demand from WW1.
When England left the gold standard while other nations remained true to it, its currency depreciated relative to others. This made their exports much cheaper and forced other nations to engage in currency devaluation to remain competitive. This became a race to the bottom as countries essentially began exporting deflation all over the world.
In 1933, president Roosevelt issued executive order 6102 which required all citizens to stop hoarding gold coins or bullion and instructed everyone to deliver all their gold to a federal reserve bank or face a large fine and/or imprisonment. This was Roosevelt’s plan to alter gold’s exchange rate for dollars and, consequently, encourage spending and combat the widespread deflation.
Currency war two took place during the 70s when the US aimed to decouple the dollar from gold. Nixon wanted to devalue the dollar relative to other currencies to increase domestic growth and exports. This move, naturally, worried other nations as their exports would be less competitive in a falling dollar environment. Because other currencies were pegged to the gold-backed dollar, this move also inspired many nations to repatriate their gold from the US—taking action on well-founded suspicions the dollar was headed for a strong devaluation, which would unfairly hurt their own currencies previously indirectly tied to gold but now tied to the fiat dollar.
The third currency war was from 2010 to present as a consequence of the 2007/08 GFC and is a battle to decide the relative value between the US Dollar, Euro, and Yuan.
When a country’s currency is pegged to the dollar and the Fed starts printing dollars, those countries either buy more dollars or begin printing their own currency to maintain the peg. If they choose printing, this often causes local inflation. China is a nation financially fortunate enough to just buy dollars whenever this happens. This actually strengthens their currency because no additional yuan are added into the money supply to combat the Fed’s inflationary policies.
China’s decision to peg the yuan to the dollar mistakingly assumed the US wouldn’t abuse its privileges. When the Fed’s QE began inflating the dollar away, China was forced to print more yuan to keep the peg or choose to revalue the yuan relative to the dollar, which would increase the cost structures of their economy. Because China was more of a booming economy, the inflation they were importing from the US was much more dramatic than the inflation the US was experiencing. Whether China chose to revalue or inflate, however, it would lead to their exports being more expensive and, thus, would leave the US more competitive and their exports less competitive.
The idea that increases in prices move together with increases in wages is known as money neutrality, but this relationship is rarely uniform across the board. Many jobs and industries do not experience a commensurate increase as prices rise and thus are much more affected by inflation. The fact that the relationship between price and wages isn’t certain or ubiquitous leads to many winners and losers with the Fed’s constant path towards long term inflation. Savers are penalized and those holding assets and using leverage are rewarded.
Money Supply x Velocity = Nominal GDP (Price Changes and Real GDP)
In this equation everything but velocity is mostly in the hands of the Fed. They can decently predict and largely control the money supply, inflation, and productivity, but velocity is dependent on consumer psychology. The Fed can attempt to affect this via the wealth effect if they want to increase velocity or via inflation fear mongering if they want to slow velocity, but it is still very unpredictable and, ultimately, up to consumers.
At a certain level of complexity, the energy put into a nation (money/taxes) yields diminishing returns and that nation must adjust if they are to avoid collapse from over consuming itself by yielding less energy/money than it takes in. To do this, they must either simplify the system to improve the multiplier from the energy inputs (yield more from the money it takes in), engage in conquest to add to its outputs and compensate for the lacking multiplier, or collapse (the chaotic and forceful version of simplification).