With the two largest economies in the world fighting tooth and nail to devalue their currencies and smaller countries anxiously trying to protect themselves with limited resources and potentially ineffectual policies, what chance is there to avoid the currency war or a larger trade war?

If you travel to either Buenos Aires or Bucharest, you will notice something interesting about the architecture. It looks like Paris. The reason is quite simple. In the last great era of globalization, from about 1870 until the First World War, architectural styles and tastes among developed and developing economies became very similar. Capital was able to flow between different countries due to similarity of laws, many of which were determined by the old colonial powers of England and France. Of course, this party ended with the beginning of the First World War and did not begin again until the end of the Cold War. What investors must understand is that globalization is not a technological imperative, but a result of coordinated regulations. It is now under threat by a new war, a currency war.

The probability of a currency war must be taken in context. A currency war, to paraphrase Clausewitz, is "nothing but the continuation of state policy with other means." The object of state policy is always to protect the state or, to be more specific, to protect the political futures of those politicians who happen to be running the state. Politicians are notoriously shortsighted, so some of the effects of the present dislocations caused by competitive currency devaluations may have longer lasting and more general effects than is currently anticipated.

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