A rate war has broke out, with unforeseeable consequences. Depreciation of the dollar in order to preserve the domestic economy is wishful thinking at the expense of the interests, the outbreak of war as well as the exchange rate is increasing the possibility of a trade war, cast a shadow over the global economic recovery. U.S. dollar fell, not only directly contribute to global foreign exchange reserves shrink, the dollar carry trade more spread, a lot of hot money will flock to the global investment market, rampant speculation.

As developed commercial banking system and financial system was destroyed during the financial crisis, though a large number of coins, but credit is still facing short-term deflationary pressures. Therefore, a large number of overflow from the U.S. and Europe into the emerging market currencies, pushing up the asset bubble, the country’s economic cost and cost of living rose sharply, the overall inflation starting to show. Another part of arbitrage funds into the commodities futures market, pushing up asset prices, and lead to substantially increase agricultural production costs, emerging markets are facing stronger inflationary pressures and asset bubbles.

Recently the price of gold steadily rising, and the first contact 1300 U.S. dollars / ounce mark, and also a continuous influx of emerging market funds. Fund tracker EPFR Global data show that, as of September 1 this year, emerging market debt and equity funds have received 14 weeks of consecutive net capital inflows. The continuing influx of arbitrage funds control the property market even more emerging market countries, the effectiveness greatly reduced.

Banking systems in emerging countries were not hurt too much the financial crisis, depressed interest rates and a lot of liquidity provided them with credit expansion space. Rapid rates in emerging markets is the U.S. and Europe at the reflection of excess liquidity, asset price bubble in many places has been suspected. The next decade, liquidity in the world has a surplus of emerging countries will follow if the liquidity to invest in real estate, asset management, you may repeat the mistakes of the nineties in Southeast Asia. High-risk assets at any time may result in reversal of capital markets, triggered by a sudden adjustment.

In addition, in the context of the dollar, emerging markets, the effectiveness of the monetary authorities intervene in foreign exchange is also very limited. Foreign exchange traders noted that the current situation of global foreign exchange market before the outbreak of the subprime crisis and the 2007 different. U.S. benchmark interest rates during 2007, the highest at 5.25%, U.S. 10 year yields 7.5%, central banks buy U.S. treasury bonds by the form of dollar reserves, the pace of intervention in domestic currency appreciation, or at least earn a relatively high yield U.S. Treasury bonds . However, the current U.S. benchmark interest rates at 0-0.25% by the end of August the 10-year U.S. Treasury yields fell to 2.42% of the 19-month low, U.S. Treasury yields close to 0.42% for the biennium a record low, which means that intervention foreign exchange market could face “loss”, not to mention foreign exchange arbitrage funds can often bypass the intervention. Central banks intervene in currency appreciation into their own funds, may be far lower than the types of funds of funds to buy up the amount of domestic currency, leading to intervention in the exchange rate action failed. As usual, this currency war, the parties did not stand a fair starting point.

Basically, the current international monetary system is the source of global imbalances, exchange rate also contributed to today’s global market, the root cause of chaos. “It’s hard to imagine a government with its own currency in the international debt situation, to control impulse spending is maintained.” Zheng Xueqin, Managing Director of the Chicago Board Options Exchange, said, like wearing the same tights can not lose weight, adjusting the exchange rate also can not solve the economic imbalances.

International monetary system to get rid of the negative impact on the human economy to be on the contemporary international monetary system reform. The basic direction of reform is to achieve diversification of the international reserve currency system, and gradually reduce dependence on the dollar. To this end, efforts to promote regional monetary and financial cooperation, and promote the internationalization of the RMB may be the only option.

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Category: World Affairs
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