Avoiding Currency Wars through Monetary Liberalization

Throughout the second half of the 20th century and the first decade of the 21st century, asymmetric warfare became a central issue in international affairs. States are now trying to adjust their security agenda to the new threats represented by non-state actors, yet the learning process is long and sustainable solutions are hard to find.

In the field of economics, a similar situation is slowly unfolding. Developed economies had grown accustomed to a world were free market capitalism was the norm. Regardless of the several examples of state intervention that undermine such regime of economic liberalism, radical proposals of socialist and interventionist thinkers had slowly been forgotten and discarded.

This “end of history” scenario did move several emerging economies towards the laissez faire paradigm, yet some of these new actors have adopted their own alternative model in what most authors call “state capitalism”. Superpowers like China are a good example of this hybrid were the state now enforces economic dirigisme in a more complex way. Central planning is no longer the norm in these countries, so the private sector can actually develop through capitalist means, but only as long as it stays under direct or indirect control by the State.

Since “state capitalism” is an asymmetric challenge to free market capitalism, it is only normal than economic tensions go up as both models gravitate towards each other. Protectionism remains the most obvious example of what may happen if both systems are unable to coexist, yet another troublesome scenario that is often overlooked is that of monetary tensions.

Developed economies should be aware of this. In most aspects, capitalist countries hold the advantage over “state capitalist” countries because their higher degree of competition enhances efficiency in the market and thus promotes a more vibrant and dynamic economy. However, in the field of monetary policy, the State holds a monopoly over money in both models, thus eliminating what could be a very important comparative advantage for the more developed economies.

It is true that China’s manipulation of the yuan has upset several capitalist economies. However, central bankers in those countries can hardly make a case against monetary manipulation while they apply all sorts of discretionary measures (i.e. quantitative easing) to try and tackle the on-going crisis. In the end, both systems are guilty of the same sin: manipulating their currencies to avoid painful yet necessary reforms.

In the end, if the capitalist countries want to remain ahead of the “state capitalism” bloc, they must free their monetary system and allow currency competition once and for all. While this important step is not yet taken, holding a monopoly over money will lead to an underperforming economy were inflation is the norm, asset bubbles boom and bust in a recurrent way and socioeconomic progress is mediocre.

Diego Sánchez de la Cruz is an analyst at Libertad Digital. His work on international economics has been published in different media outlets.

Written by Diego Sánchez de la Cruz, alumnus of the Master in International Relations (MIR)