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The Rupp Report: Short-sighted Egoism

Jürg Rupp, Executive Editor

Sometimes it is a phenomenon how fast the human brain, at least in a part of human society, can forget bad experiences. After the financial crisis in 2008 and 2009, the whole world is showing a more smiling face these days. However, we face a kind of currency war, one could say. And the fear of a new crisis is based again on egoism and short-sighted advantages and, last but not least, of greed of a very well-known part of our society.

Money Makes The World Go Round
Since the financial society discovered the possibilities of betting on the volatility of currencies, there is a financial merry-go-round among the leading currencies of the world. One example is the euro. Since February, the decreased value of the euro is more than some 10 percent, in spite of strong activities from many federal banks in Europe and Switzerland.

Some days ago, the Brazilian minister of finance warned about such a crisis. To prevent any problem of its own currency, the real, Brazil plans to increase the tax on financial transactions already existing from 2 percent up to 4 percent to discourage excessive capital imports to the country.

It's You, Not Me
This is the outcome of the game that many countries are playing with their own currencies. And, of course, every country has enough good reasons to defend its activities and blame the rest of the world for their egoism. In the past, the federal banks of a country whose currency came under pressure tried to support its currency with adequate steps to regain its strength. This time, it's different. For an average citizen, it is quite unbelievable that some nations are quite happy with their low currencies, which will, they think, increase the chances for a strong export industry.

This might be right, but it is short-sighted. The consequences could be more dramatic than the recent crisis. Many experts have warned about artificial currencies and exchange rates. Today, the global economy is so intermingled that, in the long run, only global concepts can survive. One of the problems is the low interest rates in the developed countries. These low rates encourage some people to get cheap money and invest it in so-called developing nations, such as Brazil. This investment can create a negative pressure on the local currency.

The Real Danger Is Protectionism
If all countries should participate in this vicious circle of currency devaluations, the effect would remain the same as no devaluations. However, the money supply would further rise. For emerging countries with strong growth, this devaluation could stir up inflation. It is therefore more probable that these countries would not defend themselves by manipulating their own currency but via direct interventions in the capital markets. This is called protectionism, which should be avoided to prevent long-time damage to the global economy and the upswing of local markets.

Tolerance Is Urgently Needed
Dominique Strauss-Kahn, director of the International Monetary Fund, just warned countries about a currency war and jeopardizing the current upswing. He fears that worldwide competitive currency devaluations could trouble the situation and that countries should not use their currency as a political weapon. Such behavior would represent a serious threat for the global business recovery. Also, in the long run, the consequences are negative and could cause great damage.

Pascal Lamy, director-general of the World Trade Organization in Geneva, said recently that he's optimistic that the countries will not risk starting an economic war. In a global world, he said, every country must show some tolerance for its counterpart and make some sacrifices to find a true global balance for the future.

A very strong example of team spirit just ended happily in Chile: 33 miners were saved by a seemingly endless number of rescue people after being buried in a mine for more than two months.

And the answer to the phenomenon of how fast the human brain can forget bad experiences? According to news reports, the American banks and financial institutions on Wall Street are paying bonuses totaling $144 billion. This is a new record-high payment. Isn't it high time to reshuffle the cards and play with open rules?

October 19, 2010

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