Currency Conflict on the International Scene

Currency Conflict on the International Scene

  • 10 January 2012

‘Global imbalances’ – namely the persistent US current account deficit and the surpluses of China and other countries – have been discussed for years, but remain unresolved. Now, the aftermath of the financial crisis of 2007–8 has brought about even more ‘imbalances.’ Within Europe, some economies (particularly those of the southern fringe) are uncompetitive, and have current account deficits, while others (particularly Germany) run surpluses. The recession that has followed the financial crisis has plunged the public finances of Europe’s southern fringe (Greece, Portugal, Ireland, Italy and Spain) into crisis. The fall in wealth caused by collapsing real estate values and the financial crisis has caused a rise in private saving and in public borrowing. This shift is not confined to Europe, but affects the United States too. Meanwhile, Japan has had chronic public deficits since the early 1990s.

Fully functional global and national financial markets are supposed to enable ‘imbalances’ to exist, channelling funds from surplus to deficit units. Exchange rates should adjust to take care of undervalued and overvalued currencies. The global economy should adjust naturally without intervention towards equilibrium. In practice the process has been marked by crisis and conflict.

It is not surprising that households, enterprises, and banks are attempting to rebuild their balance sheets after a major loss of net worth, but not all entities can be in surplus at the same time. Attempts to do this will not succeed, and are likely to cause a prolonged recession. Avoiding this requires coordination among countries, and of policies within countries to stimulate spending.

This lecture will analyse the causes of these problems, a number of scenarios for future developments, and the consequences of various macroeconomic policy options.

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LECTURER

Tuesday 10 January 2012

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Tuesday 10 January 2012

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