Call of Money: Modern Warfare 2: Electric Boogaloo
Round two, baby!
You thought we would only do one article about Currency Wars? Are you insane? If people can get away with 13 different shows about Storage Container Wars, then I can at least bug you for two articles.
To those of you that read the last one, you’ll remember we talked about how Trade Wars and Currency Wars were mostly to reduce the amount of money leaving your own country by making your competitors goods look worse than your own. To anyone that didn’t read it, we talked about why all the supermodels on the planet secretly want you and 5 sure-fire tips for increasing the size of your genitals… promise.
But neither of these really seems like much of a war. Sure, you’re stuffing over neighbouring countries, but it just doesn’t have that Hollywood, Saving Private Ryan-like pizzazz. It’s mostly been increasing domestic exports in a roundabout way.
So let’s talk about a Financial War.
Basically, a Financial War is when one country uses the financial markets to screw another country…
That’s as Oxford English Dictionary a definition you’re going to get. The term isn’t very concrete.
So, rather than explain the term, lets get into an example.
In 2012, America was a little upset with Iran for RSVP’ing ‘Maybe’ on their party invite… Or maybe it was the nuclear program, I can never remember which.
In order to financially cripple Iran, America banned Iran from using any system that was based in US dollars.
As previous articles have pointed out, this tends to be hard on a country since almost every international trade is handled with US dollars.
How does that work? Why don’t they just trade with countries other than America?
Well let’s say you have a deal to sell Australian Ugg boots to Iran. What currency are you going to trade with? Unless your boozy Aunty accidently books a holiday to the city of Shiraz, you’re not going to need Iranian Rial any time soon.
In the same way, no one in Iran wants our dollarydoos. So what do we dollarydoo?
We use US dollars. On the Iranian side, they convert Rial to US dollars. They then buy the shipment of Ugg boots with US dollars. On the Aussie side, we take those US dollars and convert them into our far prettier currency. Fight me, America.
Without access to the US dollar market, that trade can’t happen.
Suddenly, no one wanted to have Rial, since it couldn’t be easily traded and so the value of the rial tanked. Its value dropped by about half and there were suddenly massive food shortages as people couldn’t afford what they once did.
All because America flexed its muscles in the banking sector.
Iran didn’t take this lying down. They started using their money to buy a product that was coveted the world over and easily tradable… but when they couldn’t find enough Beanie Babies, they resorted to buying gold.
After all, you might not want to be paid in rial, but if someone offers you a suitcase full of gold bars… you’re going to take the suitcase full of gold bars. Sure, it cost Iran an arm and a leg to buy all this gold with all those undervalued rial, but if the US devalues the currency any further, at least they will have some 24 karat magic to keep them afloat.
That’s when America hit em with the ol’ one two and banned gold sales in the area. Countries like Turkey, which had been more than happy to trade gold at marked-up prices, now wouldn’t sell any more for fear of upsetting the US.
So Iran had to go on the black market for gold. And that meant even more exorbitant prices.
Effectively, by messing around with the banking system, the US was able to cost Iran billions.
By the end of 2013, Iran agreed to cut back on its Uranium enrichment in order to be let back into the big boys club.
Not a single bullet was fired and Iran was devastated. The US also attacked Syria in a similar way.
See, reducing the value of a currency, like in a Currency War, is only good for the country if the end result is stable. If $10 worth of stuff becomes $5 because the currency is devalued, that’s great, I’ll take two please.
But without that stability, a currency losing value is terrible. $10 of stuff becomes a big fat ‘?’. Is it worth $5? $3? $1.69? (nice) Who knows?
Suddenly, the value of the currency becomes nigh on worthless, because people are too anxious about its price to want to trade with it. I don’t think I need to explain this to you, but if you cant trade money for goods, it basically becomes Monopoly money.
Now to answer the question of last weeks article, why is it that America is currently in a trade war with China and not in a Currency war? As Australian Chief Economic Advisor Chrissy Amphlett once sung:
‘There is a fine, fine line between pleasure and pain’.
If America tried to do the Bunnings discount on China’s goods and “Beat em by 10%”, China would retaliate. If China retaliated, either by messing with the banking system or imposing sanctions on foreign companies or just lowering the value of their own currency, America would retaliate.
Does the two biggest economic superpowers of the world getting into conflict by attacking currency values sound terribly stable to you?
Let’s ignore for now the arguments that America has been in a currency war by engaging in Quantitative Easing (QE), since that will need its own article. Suffice to say, any time America devalues in any way, they come up with more excuses than a pregnant nun.
A currency devaluation is great for trade and countries love it. However, a currency devaluation from financial warfare is terrible for trade and countries hate it. And who said finance was complex? It’s much easier to just call XI Jing Ping ‘Winne the Pooh’ on Twitter. God speed, Trump.
