The Currency Quandary

Deposits will flow back into Greek banks.

Who Caused the Currency Wars?

But structured deposits for example, deposits whose rate of return is linked to the performance of the New York Stock Exchange are becoming increasingly popular.

Deposits in the branches of American banks in Buenos Aires were to be as safe as deposits in Miami.

World currency standards have enormous inertia.

There have been financial and monetary consequences as well.

The ensuing currency battles are being fought on several fronts foreign exchange intervention, quantitative easing, and capital controls on inflows.

Of course, there is considerable irrationality in currency markets.

Other exchange rates will respond to these shifts.

Can Trade Agreements Stop Currency Manipulation?

Currency frictions can lead eventually to trade frictions, and currency wars can lead to trade wars.

That generally transfers the deposits from the lending bank to another bank.

This is also partly why the Greek economy is affected by the tax on deposits.

The currency wars themselves are merely a skirmish.

Foreign exchange reserves are an immense 1.9 trillion.

Admittedly, some of the major currency s movements during the past year can be regarded as normalizing.

Official foreign exchange reserves will soon reach US 2 trillion.

The present currency war is but another sign of that disorder.

Second, exchange rates need to reflect economic fundamentals.

In 2003, Venezuela implemented rigorous and complex currency regulations.

The authorities may hope that their plan to insure bank deposits will shift deposits from the three largest banks to many smaller banks around the country, facilitating local startups access to financing.

The Chinese authorities do it today, and they also set the minimum deposits banks must maintain with the central bank.

Or the deposits can be consumer paper issued by KKR Atlantic Financing, and the loans can be CDO sub prime mortgage tranches that KKR Atlantic holds in its portfolio.

Bank subsidiaries will increasingly have to finance local lending with local deposits and other local funding.

The deposits can be individuals paychecks and the loans can be to small businesses.

But there have been more recent occurrences of nasty currency wars.

Today s trade and currency battles would then become a Kulturkampf.

In the past, foreign exchange markets paid less attention to structural factors.

These are large numbers even for Russia, with its currency reserves of 480 billion.

Indeed, the worsening banking crisis, with deposits fleeing from the eurozone periphery, is further strangling Europe s growth prospects.

When banks make loans, they create deposits for borrowers, who draw on these funds to make purchases.

But China s rulers know that their highly repressed banking system is vulnerable as the country continues to pursue gradual financial liberalization, and that foreign currency reserves may be needed for recapitalization.

The US Treasury welcomed government intervention in exchange rate markets, and encouraged the IMF to support such interventions with mega billion dollar loans to crisis countries.

Developing nations should also push for a Tobin tax a tax on global foreign currency transactions.

Finally, there is the G 20 s promise to reduce monetary and fiscal excesses in an internationally coordinated way.

Until Argentina's peso imploded, fixed exchange rates were fine.

That scare was contained when the G 7 committed to increase guarantees of bank deposits and to backstop the financial system.

But, even if exchange rates work in mysterious ways, their cushioning effect is undeniable.

Moreover, global currency markets would be disrupted, and the global economy would deteriorate.

Some enthusiastic Europeans encouraged Asians to diversify their reserve holdings.

For surplus countries that want to accumulate reserves, it would reduce exchange rate risk.

Sometimes monetary and fiscal authorities have an obligation to ignore the wilder historical parallels and look at a broader picture.

There have, of course, been many examples in history in which currency unions or single currency states have broken up.

The logic behind the separation was absolutely clear banks whose deposits were insured by the taxpayers should not be allowed to speculate with their depositors money.