EC The Dollar And Its Rivals

I was in graduate school, studying American foreign policy when I stumbled on Riccardo Parboni's "The Dollar and Its Rivals".  This thin volume showed how the foreign exchange market was the arena in which capitalist rivalries were expressed. More than any single book, it set me on a more than a 30-year path.

The dramatic world of foreign exchange that Parboni depicted changed in a significant way in the mid-1990s.  Led by the shift in the US, and the appointment of Robert Rubin to replace Lloyd Bentsen at Treasury, the foreign exchange market was de-weaponized. That is the real meaning of the strong dollar policy. It was a signal to the world that the US would no longer seek a trade or financial advantage (reduce debt burden)by depreciating or threatening to depreciate the dollar. This marked the end of the brief period in which the major industrialized countries tried to direct the currency market. It took several years but letting markets determine exchange rates was endorsed by the G7 and G20. 

Around the launch of the Fed's asset purchase plan, there was a surge in discussions spurred by Brazil's finance minister that this was a currency war.  Many observers confused manipulation of interest rates and the manipulation of currencies and often seemingly on libertarian grounds, seeing it as the state's encroachment in the market.  However, the significance of the difference is on practical, not ideological grounds. 

Seeking trade advantage through depreciating one's currency is a zero-sum exercise. The depreciating country ostensibly takes part of the aggregate demand from another country. It puts the others in a position to consider depreciating their own currency, leading to a downward spiral (see the 1920s). Easing monetary policy using orthodox or unorthodox policies stimulates domestic demand and could spur other countries to cut interest rates and increase their own demand. Manipulating monetary variables can be a non-zero sum game. 

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Read more by Marc on his site Marc to Market.

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Harry Goldstein 1 week ago Member's comment

Very impressive.