When two elephants fight, it is the grass that suffers

They say in parts of Africa that when two elephants fight, it is the grass that suffers. Well, for much of the past two years, the grass has suffered as the two elephants, the US and China, have been having a fight. It has many levels, but the one that has touched me most is their skirmish in financial markets, where the US wants China to make its currency’s value increase and stop taking unfair advantage of its currently overly weak currency. The US wants to grow faster but China is hampering this with a kind of beggar-my-neighbour approach of artificially cheap currency, and so continuing to see very rapid levels of growth, when overall the level of activity in the world is really sluggish. Blades of grass like me, operating in foreign exchange markets, have seen that part of this battle play out in various ways, and it has recently involved the US having the pleasure of seeing its currency weaken sharply, albeit for reasons that seem at first glance to have nothing to do with China-US trade.

Another blade of grass–and sorry for saying it–has been Japan, who also saw the impact of Chinese financial policy (through China using its enormous reserves of foreign currency to increase purchases of Japanese government bonds) add to increasing appreciation (rise in value) of the Yen. Japan cried enough two weeks ago when it started some aggressive intervention, but that cannot deal with the underlying problem. It can cause a lot of confusion and dislocation, though.

But, there are swathes of grass that are now realising that this skirmish is heading their way. Producers of goods and services in the US and their political representatives have been complaining about unfair competition from China, even though there are now few areas where the two countries. This threatens to escalate into a full-blown trade war between the two elephants. I have a feel that the elephant from the east will get the better of this stroll through the savannah, but we may all be flattened afterwards.

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About The Grasshopper

Professional international economist, recently retired from an international organization. I use blogging as a way of organizing my ideas and thoughts about a range of topics. I was born in Jamaica, and spent many years being educated, living, and working in the UK. I lived in the USA for a few decades, and worked and travelled abroad extensively. My views have a wide international perspective. Father of girls. Also, married to an economist.
This entry was posted in Economics, Financial markets, Government, Politics, World economy and tagged , , , , . Bookmark the permalink.

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