For the next several years I expect the global economy will suffer from anemic consumption growth. Currency intervention is just one of many policy tools that can be used to acquire a greater share of global demand, now the world’s most valuable economic resource, along with manipulating after-tax wages, suppressing interest rates (in bank-dominated economies), raising trade tariffs, imposing import quotas, and subsidising production directly. Countries that have excess demand and very large trade deficits may or may not be justified in trying to weaken their currencies or otherwise altering the trade balance, but when countries with deficient demand do so, they almost certainly invite retaliation.

And we know how that game ends. In 1930, following France’s very successful 1928 devaluation and Britain’s tightening of trade conditions within the Commonwealth, the world’s leading trade-surplus nation passed the Smoot-Hawley tariffs in a transparent attempt to gain a greater share of dwindling global demand. This would have been a great strategy for the US had no one noticed or retaliated, but of course the rest of world certainly noticed, and all Smoot-Hawley did was accelerate a collapse in global trade which, not surprisingly, hurt trade surplus countries like the US most.

We seem to be following the same path, and in a beggar-thy-neighbor world any country that does not participate in retaliatory policies will suffer. The only question is which retaliatory policy. I suspect that countries that can intervene in the currency and manipulate domestic interest rates will select those polices as the most efficient way of intervening in trade. Countries that cannot will almost certainly resort to trade tariffs. And it is probably too late for global policy coordination to make much of a difference. It would be very difficult for policy coordination to limit all the many ways countries can and do cheat, and in the end the trade-deficit countries will probably find it easier to retaliate openly and directly. And why not? Diversified countries with large trade-deficits have most of the best cards in any trade dispute. Simple game theory suggests that a sub-optimal result is almost inevitable absent a policeman to bully participants into good behaviour.