Explained: Currency wars
This month’s G-20 meeting of industrialized countries was rife with talk of potential “currency wars,” in which states try to devalue their currencies to help their economies. While a central tension is the United States’ unhappiness with China’s undervalued yuan, the issue is really hydra-headed: One country’s actions can create many reactions globally. Currency policies are a particularly hot topic because the United States can no longer try two traditional remedies for a sluggish economy: government spending, because the political tide has turned against it; and lower short-term interest rates, because they’re already effectively at zero. As a result, this month the Federal Reserve announced a new round of quantitative easing, in which the government puts cash into circulation by buying back its own bonds. Intended to encourage business activity, the move could also drive down the dollar. But that should actually boost the U.S. economy: a weaker dollar would...