If you are not a finance shark, here’s the dope, currency wars mean big economies in a slugfest to scupper the value of their own currency. With the recession assuming Great Depression proportions, the International Monetary Fund (IMF) has warned that the stage could be set for a full-blown currency war.

Currency wars are fuelled by the need to export profitably, for which the buyer should have a strong currency and the seller a weaker currency, hence the flurry in country after country to pull down the value of its currency.

For too long the US has been the buyer with the market flooded with Chinese goods. Now the American economy is in damage control mode as it tries to extricate itself from its worst ever unemployment crisis in the post-Depression era. Someone has to buy, as the US has run out of consumer capacity, and wants others to pick up the tab.

Debt-strapped European households can no longer indulge in splurging on credit, and for this dysfunctional structure to hold up, its time for a swap: the US has to save, while China has to buy, and not just produce and export with an infra of SEZs with appalling living conditions and underpaid workers.

Washington has put on its boxing gloves and armour to take on the Chinese dragon, retaliating with its Reform for Fair Trade Act, to punish those who manipulate currency.

The WMD in the US arsenal is the Federal Reserve’s QE2 deployment. This will mean flooding the culprit’s economy with surplus liquidity, so that wage costs go up, besides a currency revaluation by invasive means so that export is not so profitable for the offender.

Currency wars can cause exponential inflation and are dangerous, but it looks like it is a last ditch measure to salvage plummeting economies.

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