IN THE genteel world of international financial diplomacy characterized by staid summits and staged photo ops, martial metaphors are out of place. So in October, when Brazilian Finance Minister Guido Mantega warned of an impending “currency war,” he duly shocked the financial world. The United States, Britain, Switzerland and Japan, Mantega complained, were all simultaneously attempting to push down their currencies in an effort to export their way out of their economic doldrums. Their policies were in obvious conflict, since not every country can weaken its exchange rate against the others. This was a zero-sum game that could only come to grief.
Moreover, these policies came at the expense of emerging markets, which would see their exchange rates rise and thus the price of their exports increase to uncompetitive levels as a result of the tsunami of capital now flooding into their markets as investors tried to find better returns than those offered by the West. Developing nations would be forced to meet fire with fire. Their governments would be compelled to slap on controls to prevent financial capital from flowing in. They would impose taxes on foreigners seeking to buy their stocks, bonds and other securities. Their central banks would have no choice but to intervene in the foreign-exchange market to prevent their currencies from rising.