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Brazil is an important case because of its geographic, demographic and economic scale, but it is by no means the only country caught in the cross fire of a currency war among the dollar, euro and yuan. Other countries implementing or considering capital controls to stem inflows of hot money, especially dollars, include India, Indonesia, South Korea, Malaysia, Singapore, South Africa, Taiwan and Thailand. In every case, the fear is that their currencies will become overvalued and their exports will suffer as the result of the Fed’s easy money policies and the resulting flood of dollars sloshing around the world in search of high yields and more rapid growth.

These capital controls took various forms depending on the preferences of the central banks and finance ministries imposing them. In 2010, Indonesia and Taiwan curtailed the issuance of short-term investment paper, which forced hot money investors to invest for longer periods of time. South Korea and Thailand imposed withholding taxes on interest paid on government debt to foreign investors as a way to discourage such investment and to reduce upward pressure on their currencies. The case of Thailand was ironic because Thailand was the country where the 1997–1998 financial panic began. In that panic, investors were trying to get their money out of Thailand and the country was trying to prop up its currency. In 2011 investors were trying to get their money into Thailand and the country was trying to hold down its currency. There could be no clearer example of the shift in financial power between emerging markets such as Thailand and developed markets such as the United States over the past ten years.

None of these peripheral, mostly Asian, countries trying to hold down the value of their currencies is the issuer of a widely accepted reserve currency, and none has the sheer economic scale of the United States, China or the eurozone when it comes to the ability to fight a currency war by direct market intervention. These countries too would need a multilateral forum within which to resolve the stresses caused by Currency War III. While the IMF has traditionally provided such a forum, increasingly all of the large trading economies, whether G20 members or not, are looking to the G20 for guidance or new rules of the game to keep the currency wars from escalating and causing irreparable harm to themselves and the world.

CHAPTER 7

The G20 Solution

“Let me put it simply . . . there may be a contradiction between the interests of the financial world and the interests of the political world.... We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.”

Angela Merkel,

Chancellor of Germany, at the G20 Summit,

November 2010

The Group of Twenty, known as G20, is an unaccountable and very powerful organization that arose from the need to resolve global issues in the absence of true world government. The name G20 refers to its twenty member entities. They are a mixture of what were once the world’s seven largest economies, grouped as the G7, consisting of the United States, Canada, France, Germany, the United Kingdom, Italy and Japan, and some fast-growing, newly emerging economies such as Brazil, China, South Korea, Mexico, India and Indonesia. Others were included more for their natural resources or for reasons of geopolitics rather than the dynamism of their economies; examples are Russia and Saudi Arabia. Still others were added for geographic balance, including Australia, South Africa, Turkey and Argentina. The European Union was invited for good measure, even though it is not a country, because its central bank issues one of the world’s reserve currencies. Some economic heavyweights such as Spain, the Netherlands and Norway were officially left out, but they are sometimes invited to attend the G20 meetings anyway because of their economic