This comment was made this week at http://www.macrobusiness.com.au (link may be locked)
Very nice graphic and fits in with that story above about how the Chinese are not likely to sit by as other countries engage in a bit of currency warfare. After all they have been pretty good at it themselves.
I know I make this point from to time but when are people going to understand that you CANNOT be a victim of currency war unless you are stupid enough to allow unproductive capital inflows which are key to that form of warfare.
The Chinese govt does not have $4T in US treasuries because they cannot think of anything useful to do with the money at home. The US govt could easily end the game by restricting who is permitted to purchase and hold US government securities. But Wall Street would hate it of course so it will not happen.
They hold them for one purpose and that is to keep their currency lower than it would otherwise be.
That is also why Japan capital investment in Australia is $80B more than our investment in Japan. Even though the trade balance for 2013/14 involved Australian exporting $50B and only importing $18B.
A classic sign of a currency war is when we have the trade surplus but our trading partner is doing all the capital investment or simply shoving as much as possible into the $AUS by whatever transaction works.
The only way this out break of currency warfare will end is when some countries start to wise up and careful regulate capital transactions to ensure their trading partners cannot use capital flows to manipulate their currency.
Once some counties start to do it others will/must follow as they find they become one of the dwindling number of options as targets of currency war capital exports looking for a home.
Unfortunately, down in the dim land downunder we managed to build an entire economy structure dependent on cheap capital inflows and we are shit scared to start the hard work of weaning the economy off the drugs.
Even the most well informed and sensible still cannot let go of the belief that there is some magic about letting capital slosh around the world at a great rate and at the click of a few keys.
Instead of going straight to the heart of the problem (regulating the worst and most unproductive capital flow transactions) most recommend that we try to hide from the predatory capital flows behind a very small interest rate rock – even to the point where the rock is a negative number and the process of doing so ignite assets bubbles and malinvestment right through the economy.
Productive capital inflows are much less of a problem and sure at the margins it gets hard to identify them, but the really obvious transactions that are about nothing more than currency manipulation, can be identified easily and the process of winding them down can start immediately.
It is not as though this is optional.
The currency wars are not sustainable and will end by hook or by crook.
There is no alternative to putting capital back on the leash