In a SPIEGEL interview, renowned Chicago-based economist Raghuram Rajan discusses the dangers of a global currency war, the risks of persistently low interest rates and the growing income and wealth inequality in the United States.
SPIEGEL: Professor Rajan, the tensions between the United States and China are rising, several countries are trying to weaken their currencies. Is this the beginning of a global currency war?
Rajan: This is certainly a skirmish, with countries using different tools to get an advantage. The industrial economies are using ultra-loose monetary policy, while the emerging markets are using currency intervention and capital controls.
SPIEGEL: Where are the risks?
Rajan: The tools they are using will create distortions -- both ultra-loose monetary policy and intervention risk creating excess liquidity and asset price bubbles. If capital is too cheap, we will tend to use it too much. If the exchange rate is too low, we will focus on producing for exports. And if tempers boil over, we could get ugly protectionism.
SPIEGEL: China has kept its currency artificially undervalued against the dollar for years. Are the Chinese using unfair means?
Rajan: It is detrimental to China's development. Undervaluation of the currency is a form of subsidy for export companies. But they are beyond the stage where they need protection because they can already stand on their own feet. So to keep the currency undervalued is creating distortions in the economy, and this is neither efficient nor fair.
SPIEGEL: China, in other words, should increase the value of the yuan?
Rajan: It should, but an increasingly assertive China is likely to take its time doing so. An increasingly impatient US Congress, seeking to outsource the blame for slow American growth, may act. China may make cosmetic moves to fend off action. But matters could escalate. Far better would be for Asian emerging markets to put pressure on China and also accompany that pressure by increasing the value of their currencies in a coordinated manner.
SPIEGEL: How could these currency conflicts be defused?
Rajan: I think this has to do with more than just currencies. It is very convenient for industrial countries to point to currency intervention as the problem, because they are not directly guilty of that. Is it any surprise that China resists an international agreement where the sole focus will be exchange rates? But industrial countries are not beyond reproach on the kind of policies they have been following in recent years. Let us remember where this crisis originated ...
SPIEGEL: ... in the United States when the real estate bubble burst and the financial crisis broke out. So you think the equivalent of the Chinese policy of an undervalued currency is the American policy of cheap money.
Rajan: In some ways, this is a zero sum game because everyone is trying to get at the same sources of demand. We need better global dialogue on a whole gamut of policies, with nothing being taken off the table. But there is no appetite for that. Read more.
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