Setting the Stage for US, PRC Declaring Currency War

I'd rather not witness the firepower of this fully armed and operational battle station.

As competitive devaluation continues apace in the world economy via "accomodative" policies, the world's two largest economies--the US and China--appear fed up with being those left holding the bag via relatively stronger currencies. The US, after all, is supposedly doing better than most and the dollar is strengthening accordingly while China only allows for limited currency movements in a ±2% daily band. Well, surprise, surprise: these two are readying new salvos in the currency war as the EU and Japan headline efforts by so many developed and developing countries to ease monetary policy.

[1] It will be interesting to follow the US at the upcoming G-20 gathering in Turkey. For, American multinationals that derive a large share of revenues abroad are complaining about how the strong dollar is negatively affecting earnings. Witness weaker-than-expected Q4 2014 results from a number of American MNCs:

When officials from the Group of 20 nations gather in Turkey next week, the worsening currency wars will likely be a source of friction. The biggest question is whether the United States will finally get sick of being a casualty in the ongoing skirmishes...

Not surprisingly, U.S. exporters are squealing. Procter and Gamble, the world's biggest consumer products maker, last week blamed a 31 percent drop in second-quarter profits on what it called the "unprecedented" pressure in the foreign exchange market. "Virtually every currency in the world devalued versus the U.S. dollar," complained Chief Executive Officer A.G. Lafley...

Tony Sagami at investment advisory firm Mauldin Economics has argued that the members of the Standard & Poor's 500 index rely on overseas sales for 46 percent of their revenue and almost half of their profits. Companies from Pfizer to McDonalds to DuPont to Microsoft are already bemoaning the damage done to their earnings

Current US Treasury Secretary Jack Lew--a phantom so far in global economic governance--may not be a stranger to us any longer if he makes the case for "retaliatory" action against those currency evildo--I mean, trade partners:

U.S. Treasury Secretary Jack Lew said this week he's ready to retaliate if he sees other countries pursuing currency policies he deems unfair. But sympathy for the U.S. may be in short supply. Raghuram Rajan, India's central bank chief, said this week that with the Fed looking increasingly like the only central bank with any appetite for raising rates this year, the U.S. "will have to accept some appreciation of the dollar simply because it's the first one out of the box."

[2] Not willing to be the only country left behind in the competitive devaluation sweepstakes, China is readying a widening of the yuan's trading band, and commentators believe that it is to facilitate moves to the downside:

At the same time, something else is afoot in Beijing could have even greater global impact. The central bank is cooking up measures to widen the band in which its currency trades. People’s Bank of China officials say it's about limiting volatility as capital zooms in and out of the economy. Let's call it what it really is: the first step toward yuan depreciation and currency war.

China entering the currency war may accelerate competitive depreciation in the Asia-Pacific:

Any significant drop in the yuan would prompt Japan to unleash another quantitative-easing blitz. The same goes for South Korea, whose exports are already hurting. Singapore might feel compelled to expand upon last week's move to weaken its dollar. Before long, officials in Bangkok, Hanoi, Jakarta, Manila, Taipei and even Latin America might act to protect their economies' competitiveness.

If everyone depreciates, doesn't it negate benefits from beggar-thy-neighbor since everyone ends up in the same relative position? In any event, things are bound to get more exciting once the biggest players make their way into the arena of currency combat. Appropriately enough, recall the conversation between Alice (what currency warriors expect) and the Red Queen (systemic effects of everyone devaluing):

"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else—if you run very fast for a long time, as we've been doing."

"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"