Thursday, December 4, 2014

Financial War and Currency Wars Are Very Different

I have discussed financial war, which is different from currency war. Currency war is an economic policy countries use to fight deflation and encourage inflation by cheapening the currency and creating inflation in the form of higher import prices. It’s a way of creating monetary easing. It’s an age-old economic policy, used most famously in the late 1920’s and 1930’s in what became known as ‘beggar they neighbor.’ Countries were stealing growth from each other by debasing their currencies, trying to import inflation and improve their trade balances by causing cheaper exports to foreign buyers and more expensive imports for domestic buyers. That combination was seen to bolster growth.

Financial war is different. Financial war involves countries that are traditional rivals or even enemies, for instance the US, Russia, and China, with competing interests everywhere from Eastern Europe to the South China Sea. Countries have fought wars in the past using traditional kinetic methods – armies, navies, air forces, missiles, submarines and so forth. We now live in an age where, thinking about warfare, you have to look at asymmetric forms of warfare – not just traditional forms – like chemical, biological, radiological weapons, guerilla warfare, terrorism, and financial warfare. So the scenario I was discussing that involves China buying gold and selling the dollar was not a currency war; it was a financial war. There you are trying to destroy the economy of your opponent, which is a very different situation.

- Source, Jim Rickards via Proactive Investor