Currency Wars: VP Mujuru’s proposal doesn’t look so silly now

A few weeks ago Zimbabwe Vice President Joice Mujuru suggested that a move to the Chinese Yuan would be the best move she was met with a chorus of jeers from different sections of the system.

Only recently have people started making this a matter for a reasonable measure of debate. Given the currency wars taking place in which the United States is printing copious amounts of money to devalue their currency.

Now why would they do that you may ask?

It is called competitive devaluation and economics help defines it as follows

When a country tries to devalue its currency to increase its international competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exports.
In competitive devaluation, a country only gains a temporary advantage until the next country devalues as well.
Devaluation can often lead to inflation which reduces long term gains in competitiveness.

In simple terms, if my currency is cheap, then it is cheaper for you to use me to do work for you because you get more bang for your buck.

Now the US has been doing this and it has been at its most volatile in years even getting to almost 6.5 to the South African Rand. This was in reaction to the Chinese Yuan which the US feels is grossly undervalued.

While there has been a temporary truce called to make sure people didn’t go about devaluing their currency, it seems as if the impression is that many are now looking for an alternative to the United States Dollar as a reserve currency.

The Chinese themselves had already gravitated towards using the Euro but it also has been a little mischievous it seems. As a growing power and now easily the second largest economy China’s Yuan has started murmurings in the corridors as a viable alternative to the Old World currencies.

Of course this will depend on the Chinese allowing their currency to trade freely on the world market, something that they have been reluctant to do.

The French and the Brazilians are now also questioning the legitimacy of the US Dollar as the dominant reserve currency especially as the Federal Reserve Bank announced that it was planning to pour $600 billion into the market. And given that 80% world’s transactions are in greenback and yet the US accounts for only 24% of the world’s GDP you can see their point. It essentially means that the US can hold the rest of the world at ransom.