The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
Subscribe to the Flinchum File
View Archives

Digital Bullets

War is a terrible thing . . . in so many ways!

Several economists have now estimated the combined cost of the Iraqi and Afghan wars as $3 TRILLION or more.  That includes actual funded military expense plus an estimate of the life time healthcare costs for  the sixty thousand wounded veterans.  It does not include the cost of any reconstruction in those countries nor the earnings that our American dead and wounded have lost, as result of their service.

But, at least, we knew we were at war!

I think another war has broken out that worries me — a currency war.  However, there are no lead bullets, just numbers on a computer screen.  But, trillions of dollars hang in the balance.  And, like all wars, the various combatants are pointing their fingers at somebody else for starting it.

Since September, the Japanese Yen has lost 14% of its value.  That means anything you imported from Japan now costs 14% less than just a few months ago.  Holding the sales price to your customer constant — that means your profit margin went up, and you’ll probably order more from Japan.

My wife believes that — anytime you get two men together, sooner or later, you’ll get a horse-race!  She would expect nations would want a stronger currency, so they could brag about it.  While nations do like to brag about bigger and stronger currencies, they like lower unemployment and happier voters more.

Here’s the thing about currencies — a cheaper currency is good for the economy.  It makes exports cheaper for other nations to buy from you.  This means your nation has to make more stuff to export, and unemployment drops, and voters are happier.  Also, it makes imports more expensive, which improves your balance-of-trade.  (While more expensive imports increase the possibility of “importing inflation,” that is not a problem in nations that are more worried about deflation than inflation, like Japan.)

During the global financial crisis of the last few years and especially during the European financial crisis recently, the Swiss franc rose so much that it was crushing their small economy.  Their central banker opened the floodgates of money to keep the franc (CHF) from rising and is now heavily criticized for unleashing inflation.

The Euro has just hit a fourteen month high against the dollar.  It is only a matter-of-time before Mario Draghi, head of the European Central Bank, also becomes fond of inflation in order to drive down the Euro.

Of course, I do believe the U.S. began this war.  Nobody argues that Bernanke’s first obligation is not the U.S. economy.  He tried to keep the dollar low (remember when gold was $1,960).  That hurt Japan, who is now fighting back.  Europe is next.

Also, nobody will argue that anytime the world”s economic engine needs to be kick-started, it should not do so. However, it will likely be the Chinese who start the next currency war.  The world’s economic engine usually does . . .