Nov 5 / 2019
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Posted by: Angel

Currency wars, on a knife-edge

Christopher Attard analyses the causes and consequences of the economic war, with China and US as the main characters

Real wars are fought on the battlefield with weapons and ammo. Commercial wars are fought with tariffs and currencies. As the US moves away from the decades-long “strong dollar” approach, policy makers from either side of the pond have now been placed in the line of fire for supposedly driving down exchange rates, in order to gain a competitive advantage.

After the 2008 financial crisis, foreign exchange wars have simmered under the surface, even though nobody wants to admit they are waging one. For instance, quantitative easing stemming from unconventional central bank monetary policies have been actively changing the size of various fiat-currency supplies and their rate of growth. The most famous frenzy of competitive devaluations came during the 1930s great depression as countries ditched the gold standard that pegged their currencies to the metal’s value.

Escalating trade war

Barely a couple of months ago, the “nuclear option” was trending on financial news outlets, where China was gearing towards possibly generating a massive debt crisis in the US by triggering a US treasury holding sell off.

Indeed, in a drawn-out series of disputes and escalating tensions, the US accused China of mobilizing its currency, the Yuan, to gain the upper hand in trade – labelling China a currency manipulator, and roiling financial markets in the process. The trade tariffs saw China’s Yuan hit nearly as low as $7.05, the weakest level since April 21st, 2008. The PBOC then released a statement saying that it “has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox, and take necessary and targeted measures against the positive feedback behaviour that may occur in the foreign exchange market.” This was seen as an official announcement by the Chinese central bank that it remains committed to defend its interests on the currency front.

Shortly after, neither the International Monetary Fund nor the World Trade Organisation supported the initial accusation, opening the US up to international legal sanctions if it were to unilaterally hit China with retribution on that basis. Naturally, given that the US is over a third of the world’s GDP, the global economy would inevitably get dragged into this – possibly while kicking and screaming.

A bleed-out effect

2019 was the year political posturing on either side transformed into action as the world’s largest economies weaponised their respective economic tools to trade blows. Consequently, the trade war morphed into a currency and economic war, which is to say among other things that no trade deal will be established before the 2020 American Presidential elections.

Recently, the US President said he would raise tariffs from 25% to 30% on $250 billion in Chinese products, and would increase tariffs on the remaining $300 billion in goods from 10% to 15% – some of which went into effect in September. The POTUS also blamed China for not buying enough US agricultural goods and for failing to stop the flow of fentanyl, an addictive opioid, into America. Additionally, the debacle also spread to include US allegations against China which is ostensibly stealing trade secrets and forcing foreign companies to hand over sensitive technology.

In the interim, the sliding Yuan, trade tariffs on Chinese imports and other market pressures have slowed down the Chinese economy as the world’s two largest economies lock themselves in a trade war. Twelve rounds of talks have thus far failed to end the deadlock; all the while drawn out and escalating tensions begin to set the stage for the global economy to potentially reach recession territory by sometime in 2020.

The case for bitcoin

While the initial focus was on trade and foreign investment, the dispute has also dragged currencies into the mix. Business leaders have pointed out that this “trade war” could last for years, with the implications, sub-plots and complex national idiosyncrasies making for an eventual crescendo from which a winner will invariably emerge.

Meanwhile, the Internet is gearing towards taking up a revised vision of the liberal nation-state. On the one hand, the Internet has enabled people to transcend group loyalties, while on the other hand, it has caused a backlash from old-guard defenders of hard-line state control.

For instance, the digital surveillance and clear authoritarianism stemming from Beijing coupled with the militaristic rhetoric and bluster from US authorities as well as sustained expectations of a looming world economic crisis are more than enough reasons to set off alarm bells for those paying attention.

As is common knowledge, currency debasements, ethnic conflict or hard-asset devaluation aren’t at all new. Indeed, gold’s ancient and widely recognised store of value has often found itself to be one of the best hedges against outside influences of overzealous governments and regimes. However, this time around, citizen’s seeking a hedge against such threats have a digital alternative, one that is arguably more appropriate for the Internet generation by a mile.

The vital bulwark against centralised control of decrepit banking systems, untrustworthy tech behemoths and wayward governments is real; and it’s called bitcoin. Aside from the store of value argument and the immutable technology that underpins the currency’s irrefutable digital scarcity, bitcoin’s network and prime mover effects make it the most reasonable digital hedge against a probable black swan event occurring in the near future.

While a major risk lies in the possibility of global regulatory backlash against the currency, the censorship-resistant currency was built with antifragility in mind, which is to say that in theory, it should gain more strength as volatility increases.

Read more articles like this in the digital edition of Block magazine.

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