It was hardly a slip of the tongue when Guido Mantega, Brazil’s minister of finance, coined the term “currency war” in late September when describing the state of the global economy. His bold statement publicly reflected the private concerns of investors and policymakers worried about the amount of government intervention worldwide to curb currency appreciation.
This is a particular concern for Mr. Mantega, whose country is home to one of the world’s strongest currencies. In the first ten months of 2010, the Brazilian real gained 4.5 percent on the U.S. dollar and a whopping 25 percent since early 2009.
Originally the finance minister preferred to limit public spending, opposing devaluation of any kind. But he quickly reversed course when many emerging economies, notably in the Asia-Pacific region, lowered their respective exchange rates. The result: when one country intentionally devalues its currency, its exports become cheaper to foreign consumers and imports more expensive to domestic buyers. When other nations follow suit, this practice, known as competitive devaluation, drives down the economic competitiveness of all nations.
To remain competitive, Mr. Mantega increased the tax rate for foreign investments of fixed-income securities two separate times—the second time only one week after speaking at the Americas Society and Council of the Americas in mid-October. Outside economists defended his actions, noting that investors would nonetheless continue to focus on BRIC (Brazil, Russia, India, and China) countries in the interest of high returns on investment.
Now Brazil has emerged as perhaps the leading critic among developing economies on the U.S. role in a currency war. Mr. Mantega suggested non-expansionary measures to increase demand and consumption, but got the opposite when earlier this month the Federal Reserve announced it would buy back $600 billion in government bonds. Known as quantitative easing, the Fed essentially gave itself license to print new money and increase liquidity to raise bond prices and lower long-term interest rates. Brazil did not react kindly; President-elect Dilma Rousseff blasted the move as “disguised devaluation.”
Mr. Mantega recommended that developed nations agree on a consolidated action plan at the International Monetary Fund meetings in Washington DC in October and the G-20 summit in South Korea earlier this month. But if the missions of the two gatherings were to advance discussion on the issue, then they both failed miserably.