Currency War Between China and Usa Essay Example for Free

bullion War Between china and regular army EssayCurrency WarCurrency war, also known as competitive devaluation, is a physical body in internationalistic affairs where countries compete against each other to achieve a relatively first deepen dictate for their own silver. As the price to buy a particular cash locomote so too does the real price of merchandises from the country. Imports become more pricy too, so domestic industry, and on that pointfrom employment, receives a boost in command both at home and abroad. However, the price increase in imports groundwork harm citizens purchasing power. The policy send away also trigger retaliatory action by other countries which in turn butt lead to a general decline in international care, harming all countries.Reasons of Currency War Between USA and mainland ChinaCompetitive devaluation has been r be through nearly of history as countries bind more often than not preferred to maintain a high note harbor for t heir specie,but it happens when devaluation occur.China keeps its dollar artificially low so that countries like the US lead buy its goods. China is the USs largest craft partner and if they didnt sell their goods for super cheap, commercialises like India would be able to under cut the Chinese and consequently the US would buy goods from Indian preferably of China. There is so much trade between China and the US that China profits immensely without needing its Yuan to appreciate. This of course hurts the average Chinese person in that their labour is devalued but it beneficial for the country as a whole as it has apace become a super power scotchaly.In 2008, a trader paid one gold coast Cedi for one U.S. dollar, but at the beginning of April 2012, the same trader travelling to Dubai paid GH1.74 for one U.S. dollar.This way of life that year-on-year decline in the value of cedi against the US dollar was 74 per cen cartridge clipime over a three-year period.A point to note is that during the global frugal crises of 2008-2009, the cedi depreciated by 25 per cent against the dollar.Between 2010 and 2011, the cedi again depreciated 18.5 per cent against the US dollar. For last month, the cedi exchange rate depreciated 4.29 percent against the US dollar.So is the current downward dislocate in the cedi value as a dissolvent of the slowdown in the global economy or due to internal structural weaknesses? This question requires a detailed research work beyond the mountain chain of this article but it is a very relevant question to ask at this time.In economics, wear and tear is basically the symptoms of an underlying problem, specifically imbalances in the Balance of Payment (BOP), emanating from excess demand for dollars. So instead of discussing the depreciating cedi, I will rather focus my attention on the acts or factors that cause specie to depreciate and what the government peck do to arrest this problem in special cases.Before so, I must let readers know the difference between currency fluctuation and depreciation. Fluctuations in currency value are a common event and are usually no cause for concern. The minor periodical increases and decreases in value are generally due to random walk and not due to an economic event or fundamental problems.However, changes in currency value become significant when the decline in value of the currency is an ongoing trend. Technically, when currency depreciates, it loses value and purchasing power, with impact on the real sectors of the economy.Although, the economic effects of a unhorse cedi take time to happen, there are time lags between a change in the exchange rate and changes in commodity prices.Factors that de borderine the value of a currency include the current state of the overall economy, splashiness, trade balance (the difference between the value of exporting and import), level of political stability, etc.Occasionally, external factors like currency speculations on the foreign exchange market can also contribute to depreciation of the local currency. Such being the case, a government can interfere into the foreign exchange market to support its national currency and suppress the process of depreciation.Currency depreciation can positively impact the overall economic development, though. It boosts competitiveness through lower export costs and secures more income from exported goods in a similar way devaluation does.On the contrary, depreciation makes imports more expensive and discourages purchases of imported goods stimulating demand for domestically manufactured goods.Globally, governments intentionally influence the value of their currency utilising the right on scape of the base interest pass judgment, which are usually set by the countrys central bank and this tool is often used to intentionally depreciate the currency rates to encourage exports. Factors that can cause a currency to depreciate areSupply and Demand Just as with goods and services, the principles of supply and demand enforce to the appreciation and depreciation of currency values. If a country injects new currency into its economy, it increases the money supply. When there is more money circulating in an economy, there is less demand. This depreciates the value of the currency. On the other hand, when there is a high domestic or foreign demand for a countrys currency, the currency appreciates in value.puffiness Inflation occurs when the general prices of goods and services in a country increase. Inflation causes the value of the cedi to depreciate, reducing purchasing power. If there is rampant inflation, then a currency will depreciate in value.What causes inflation? Printing Money. feeling printing money does not always cause inflation. It will occur when the money supply is change magnitude faster than the growth of real output. Note the link between printing money and causing inflation is not straightforward. The money supply does not just dep end on the amount the government prints. banging National Debt. To finance large national debts, governments often print money and this can cause inflation. scotch OutlookIf a countrys economy is in a slow growth or recessionary phase, the value of their currency depreciates. The value of a countrys currency also depreciates if its major economic indicators like retail gross sales and Gross Domestic Product, or GDP, are declining. A high and/or rising unemployment rate can also depreciate currency value because it indicates an economic slowdown. If a countrys economy is in a squiffy growth period, the value of their currency appreciates.Trade DeficitA trade deficit occurs when the value of goods a country imports is more than the value of goods it exports. When the trade deficit of a country increases, the value of the domestic currency depreciates against the value of the currency of its trading partners.The demand for imports should fall as imports become more expensive. Howeve r, some imports are essential for production or cannot be made in the country and collect an inelastic demandwe end up spending more on these when the exchange rate falls in value. This can cause the balance of payments to worsen in the short run (a process known as the J curve effect)Collapse of ConfidenceIf there is a collapse of confidence in an economy or financial sector, this will lead to an outflow of currency as people do not want to risk losing their currency. Therefore, this causes an outflow of capital and depreciation in the exchange rate. Collapse in confidence can be due to political or economic factors.Price of Commoditiesif an economy depends on exports of raw materials, a fall in the price of this raw material can cause a fall in export revenue and depreciation in the exchange rate. For example, in 2011, a ton of cocoa sell for US4,000 per ton. Currently, it is going for US$2,300 per ton, translating into fewer inflows of dollars.Interest rate DifferentialI will us e the transnational Fischer Effect to explain the relationship between the expected change in the current exchange rate between the cedi and the dollar, which is approximately equivalent to the difference between Ghana and US nominal interest rates for that time.For example, if the average interest rate in Ghana for 2011 was 24 per cent and for US was three per cent, then the dollar should appreciate roughly 21 per cent or the cedi must depreciate 21 per cent compared to the dollar to restore parity.The rationale for the IFE is that a country with a higher interest rate will also tend to have a higher inflation rate. This increased amount of inflation should cause the currency in the country with the high interest rate to depreciate against a country with lower interest rates.Market SpeculationsMarket speculations can contribute to a process of spiraling depreciation later smaller market players decide to follow the example of the leading dealers, the so-called market makers, and later they confounded confidence in a particular currency start to sell it in bulk amounts. consequently only a quick reaction of the countrys central bank can restore the confidence of investors and learn the currency rates of the nations currency from continuous decline.When the currency depreciation is based on market speculations, in other words, not backed by fundamental economic factors, then the central bank comes to the rescue- intervene.A sterilised intervention against depreciation can only be effective in the medium term if the underlying cause behind the currencys loss of value can be addressed. If the cause was a uncollectible attack based on political uncertainty this can potentially be resolved.Because after a sterilised intervention the money supply remains unchanged at its high level, the locally operable interest rates can as yet be relatively low, so the carry trade continues and if it still wants to prevent depreciation the central bank has to intervene ag ain. This can only go on so long before the bank runs out of foreign currency militia.In conclusion, currency depreciation is the result of fundamental deficiencies with the domestic economy which must be corrected over a period of time to restore balance. However, where the depreciation is out of speculative attacks on the currency, then the central bank can intervene to correct the temporary anomalies, which, often is short term in nature.Lastly, intervention in the foreign exchange market by the central bank to correct fundamental weaknesses, just like the Ghanaian authority will not work, because, very soon, the central bank will run out of international reserves hence, the cedi must therefore seek its equilibrium level.The writer is an economic consultant and former Assistant professor of Finance and Economics at Alabama State University. Montgomery, Alabama.Currency War in the Great opinionDuring the Great Depression of the 1930s, most countries abandoned the gold standard , resulting in currencies that no longer had intrinsic value. With widespread high unemployment, devaluations became common. Effectively, nations were competing to export unemployment, a policy that has frequently been described as beggar thy neighbour.30 However, because the effects of a devaluation would soon be counteracted by a corresponding devaluation by trading partners, few nations would gain an allow advantage. On the other hand, the fluctuations in exchange rates were often harmful for international traders, and global trade declined sharply as a result, hurting all economies. The exact starting date of the 1930s currency war is open to debate.23 The three principal parties were Great Britain, France, and the United States.For most of the 1920s the three generally had coinciding interests, both the US and France supported Britains efforts to raise superiors value against market forces. Collaboration was aided by strong personal friendships among the nations central bank ers, especially between Britains Montagu Norman and Americas Benjamin Strong until the latters early close in 1928. Soon after the Wall Street Crash of 1929, France lost faith in Sterling as a source of value and begun selling it heavily on the markets.From Britains perspective both France and the US were no longer playing by the rules of the gold standard. Instead of allowing gold inflows to increase their money supplies (which would have expanded those economies but reduced their trade surpluses) France and the US began sterilising the inflows, building up hoards of gold. These factors contributed to the Sterling crises of 1931 in family of that year Great Britain substantially devalued and took the pound off the gold standard. For several years after this global trade was disrupted by competitive devaluation. The currency war of the 1930s is generally considered to have ended with the Tripartite monetary agreement of 1936.