08/02/2013 09:11 am ET Updated Oct 02, 2013

The Debilitating Currency War

During all my years at the helm of the National Association of Manufacturers, our small members were upset about China's currency manipulation that enabled Chinese exporters to sell finished products here for less than our people spent on raw materials. There were always a few contrarians contending that currency manipulation was not a significant factor in our recurring trade deficit, but that begged the question why China spends so much money acquiring U.S. currency and financial instruments if not to gain a trade advantage. The only advantage to currency manipulation that I know of is to gain an unfair advantage in trade.

We haven't heard much about currency manipulation lately, but according to my friend C. Fred Bergsten of the Peterson Institute for International Economics, it was and remains a major threat to the international monetary system. "Virtually every major country is seeking depreciation, or at least non-appreciation, of its currency to strengthen its economy and create jobs," Bergsten said in a recent paper. At least 20 countries have been intervening in foreign exchange markets building up reserves of more than $10 trillion.

China is the major offender, but there are others, including other Asian nations, several oil exporters and even a couple of European nations. Altogether, the manipulators account for almost one third of the world economy and more than two thirds of global current account surpluses. "Currency manipulation is very large and very widespread," Bergsten said.

And it is also very bad for the U.S. which has lost from 1 to 5 million jobs as a result of foreign currency manipulation. Europe also is a victim. The buildup of vast cash reserves by the manipulators is distorting financial markets and setting the stage for a major correction that could be calamitous as more nations rush to join the currency manipulation bandwagon. "The single greatest flaw in the entire international financial architecture is its failure to effectively sanction surplus countries," Bergsten said, "especially to counter and deter competitive currency policies."

One can argue that the Federal Reserve's quantitative easing (QE) serves to devalue our currency somewhat, but that is not its purpose. The Fed is trying to keep the economy growing. I have problems with QE, but its impact on our currency is not one of them.

Bergsten says the U.S. is caught between a rock and a hard place, increasingly dependent on world commerce but decreasingly able to influence economic developments. He challenges the popular assumption that the international role of the dollar is good for the U.S., because that is exactly what enables the currency manipulators to influence their exchange rates. He says the "dollar primacy" mentality must be overcome if we are to effectively pursue termination of currency manipulation.Bergsten contends there are effective ways for the U.S. to challenge the currency war, and that we would benefit from such a campaign. I found his paper enlightening. You can access it here.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. You may quote from this with attribution. Let me know if you would like to speak with Jerry. August 2013