To the Frontlines of International Currency War!

Hey kids, shake it loose together
The spotlight's hitting something
That's been known to change the weather
We'll kill the fatted calf tonight so stick around
You're gonna hear electric music; solid walls of sound

It's a bird, it's a plane, it's...B-B-B-Bennie of the Feds helicopter dropping greenbacks! This is a call to arms as the air raid sirens are sounding around the world. The World Bank / IMF meetings over the weekend came and went with nary a solution in sight for resolving what the Brazilian FinMin has now dubbed an "international currency war." Developing countries of the world, man the searchlights and anti-aircraft guns as we all await the incoming carpet bombing attack of that nefarious chopper pilot Ben Bernanke. The Fed chairman is set to strafe the world economy with nearly limitless dollar emissions in the name of combating deflation. We are all aware of his plans from long ago:

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

With the lack of consensus to do anything about "international currency war." it seems LDCs believe they have no choice other than to man the barricades. China, most notably, is upping reserve requirements at its large state-owned banks in an attempt to combat hot money inflows and the like:

Asian authorities anxious about currency appreciation moved to stem foreign capital inflows on Monday while a European official stepped up rhetoric about a strong euro after IMF meetings failed to defuse tensions about exchange rates.

China temporarily raised reserve requirements for six large commercial banks, four sources told Reuters, a surprise move aimed at draining cash from the economy. Thailand, also on edge about a rapidly rising currency that has alarmed exporters, said it may impose a tax on foreigners' bond purchases.

With interest rates in the developed world at record lows, investors have poured money into higher-yielding emerging market assets, driving up local currencies in the process. Governments, afraid that rising exchange rates will hurt exports and stunt economic growth, have tried to limit currency appreciation, sparking fears of a "race to the bottom" that may trigger trade tariffs and a sharp decline in global growth.

"If each country insists on its own interest during the recovery phase, it will bring about trade protectionism and will cause the world economy very big problems," South Korean President Lee Myung-bak told foreign journalists during a lunch meeting at his residence. World finance leaders made no headway on currency disputes at a weekend International Monetary Fund meeting, and Lee urged an agreement before his country hosts a G20 summit next month.

But China's central bank governor said Monday it will take time to correct the uneven pattern of global growth that has contributed to exchange rate tensions, warning that attempts at a quick fix could create more problems. "People may not have that kind of patience, so they would like to see a quick changes in the balance, but it may cause a kind of overshooting," Zhou Xiaochuan said during a discussion with other central bank governors at the National Press Club.

U.S. and European officials hold that limiting emerging market currency gains is the main cause of imbalances and has urged China in particular to let its yuan rise more rapidly.

Analysts said China's reserve requirement hike should be seen as an attempt to slow massive foreign capital inflows rather than a prelude to tighter monetary policy. "Hot money inflows have been rising. But I don't think this is a tightening move. It's just part of liquidity management," said Qing Wang, chief China economist at Morgan Stanley.

The move comes weeks ahead of a Federal Reserve policy meeting at which markets expect the U.S. central bank to begin a second round of quantitative easing, which would heap even more downward pressure on the U.S. dollar and send more money into developing economies, including China and Thailand. Thai Deputy Finance Minister Pradit Phataraprasit told reporters the Cabinet may consider a bond tax on Tuesday, though he would not comment on local reports of a possible 15 percent withholding tax on capital gains on government bonds...

Latin American governments, most notably Brazil, have also acted to curb hot money inflows while Japan has intervened to weaken the yen and is threatening to do so again. That has increased flows into the euro, which rose above $1.40 last week, and sparked concern among European Central Bank officials. Guy Quaden, head of Belgium's central bank, said global cooperation was needed to avoid "brutal" exchange rate volatility, reviving one of the strongest terms that ECB officials have used to show displeasure with currencies.

ECB President Jean-Claude Trichet last described exchange rate moves as "brutal" in late 2007, when the euro traded at a then record high. But it had little effect -- the single currency kept rising in 2008, peaking above $1.60. But because the ECB, unlike the Fed or Bank of Japan, is not expected to ease policy further, efforts to talk down the euro look destined to fail.

Meanwhile, the stage is set for further quarrels at the upcoming G20 meetings in Seoul where the major currency combatants will reconvene and duke it out mano a mano in a few weeks' time:

Pity the South Koreans. They had wanted next month’s G20 summit in Seoul to create a new financial safety net for troubled governments, seal agreement on banking capital accords and reorientate poor countries’ development policy towards the investment-led growth that Korea itself so spectacularly achieved. But instead of a new Bretton Woods they seem likely to preside over a rumble in Seoul’s concrete jungle as the global currency fist fight rolls into town.

This weekend’s instalment at the annual International Monetary Fund meetings in Washington saw China, long pummelled by the US for worsening global current account imbalances by manipulating its exchange rate, come off the ropes swinging. Zhou Xiaochuan, central bank governor, and ironically the strongest advocate within China’s governing agencies of faster renminbi appreciation, charged that expectations the US Federal Reserve would pump yet more dollars into the markets through quantitative easing was worsening imbalances and swamping emerging economies with destabilising capital inflows...

But the problem is not a lack of co-ordination: it is a radically different view of the world. Beijing simply does not accept that its undervalued exchange rate is a significant cause of global imbalances, and says that US current account and fiscal deficits are self-inflicted. In the US, the common view is that excess savings in Asia created the US current account deficit, and so the solution lies to the east. It is not just a question of who moves first: it is a question of who moves at all, and in which direction.

Given this analytical disjunct, the reason there is no deal is that there is no deal to be done. Most other member governments of the IMF, particularly the emerging markets, find themselves somewhere between the two – concerned about Chinese currency misalignment undercutting their manufacturers but also worried that investors with cheap borrowed dollars are driving their currencies higher in the search for yield.

In the absence of policy coordination, many have obviously adopted the idea that you'd better sock America first with all you've got lest it economolest you via the widely-anticipated QE 2. There will be no heroes here--only survivors--of a sort.