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International relations - Essay Example

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This paper discusses the currency war that has been in the center of discussions of the major economic powers of the world in the context of international relations and the impact of policies and actions by the different parties on the global economy and the global political order…
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International relations
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Download file to see previous pages This paper discusses the currency war that has been in the center of discussions of the major economic powers of the world in the context of international relations and the impact of policies and actions by the different parties on the global economy and the global political order. The discussions relating to the currency war cannot but take on a heavy slant in economics and economic policy, even as one cannot argue that trade is a major force that knits or destroys relationships among nations, something that has been discussed in much detail in many theoretical discussions in international relations. The latest round of efforts by the major powers in particular by the United States and Japan has been hailed as efforts that have come to be identified with a budding currency war. For instance, efforts to keep interest rates low are in keeping with the two country economies’ interests in spurring borrowing and economic activity from such lowered interest rates, but the net effect of the actions tied to this have been a downward pressure on their currencies, leading to a currency devaluation in practice if not in direct fact. The consensus even among the major central banks in Europe is that indeed the currency war is at hand, with Japan, for instance, deliberately setting the stage for a weaker yen on the back of announcements to pump massive amounts of liquidity, to the tune of US 1.4 trillion dollars, into the Japanese economy for the next 24 months. This has led to the yen depreciating by 14 percent after the announcement versus the US dollar. A weaker currency helps countries like Japan because it allows them to export their products at lower prices compared to competitors in other countries. At the same time, a weaker currency allows a country to shore up its investment base, owing from the way the weaker currency reflects the efforts of government, such as Japan, to infuse liquidity and to keep interest rates low, all in the name of priming the country economies for growth (Chavez-Dreyfus; Popplewell; Morley-Freer; Tan and Noonan). Of course this state of affairs is not lost on China, which has said likewise that the move by Japan to infuse massive amounts of liquidity into the Japanese economy is, as others have noted, tantamount to launching a currency war. Already, Chinese economists have pressed the panic signal owing to the fact that the infusion has resulted in the massive weakening of the value of the Japanese yen, which in effect is also a devaluation of the currency done through the liquidity infusion rather than by direct means. In retaliation, the Chinese economists have urged the Chinese government to launch its own moves aimed at devaluing the yuan, The interconnectedness of world trade and the way trade has become so intertwined that it has come to dominate discussions in international relations more than war is being demonstrated in the way the move by Japan is causing a cascade of effects through the global economy and potentially hurting many players. For instance, in China, the prognosis is that the de facto devaluation of the Japanese yen would cause a diminishing of the competitiveness of Chinese exports. Moreover, the move by Japan to infuse money into the system while keeping interest rates down is being seen as encouraging speculative activities across borders. Speculators may use low interest rate loans from Japan to borrow money that they can then use to speculate in Chinese securities and investment instruments, causing havoc in the Chinese equities and financial markets. It is in these terms that the Chinese are viewing the currency devaluation in Japan and the United States, and it is along the lines of Japan waging an economic war that the Chinese econo ...Download file to see next pagesRead More
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