As “A Note on the Currency Wars” Paul Krugman states in his Blog (NYT) that the competitive currency devaluation practically doesn’t have any effect on the national economy, as soon as everyone behaves the same. He says, that a “wave of mutual currency purchases would be harmless but also pointless. “
Raghuram Rajan (ftd, 26/10/2010) is of a similar opinion but out of a different reasoning: He states, that if every economy is devaluating their currency to enhance their exports, then automatically everyone is trying to avoid investments from different countries. But where do those investments go? At some point emerging countries like Brazil can’t stop these capital investments anymore, which already lead to a rise in Brazils’ currency, the Real, by 35% compared to the dollar from beginning of 2009 (ftd, 24/10/2010). Instead of trying to enhance short term economic growth like this, Raghuram Rajan suggests that countries should extend their focus beyond short term and make their economies more efficient and balanced in the long term. Keeping on with this “Currency War” will only burn out the world financially.
Personally, I am not quite sure which side to believe: I don’t think that the overall currency devaluation which is happening in the world right now is harmless. On the other hand, from the Great Depression in the 1930s the world has learned that the “non-spending” policy of the Federal Reserve in the USA aggravated the consequences of the Financial Crisis.
I will be happy to hear your ideas.