Protectionism and currency battles

Somehow, I cannot imagine Christine "I am not a witch" O'Donnell casting a meaningful Senate vote on bills that address anything remotely related to the following discussions :)
(editor: why pick on O'Donnell?  You think Al Franken can? Awshutup!)

My increasingly favorite economist Raghuram Rajan is interviewed by Der Spiegel:

SPIEGEL: China and India are advancing to become the engines of the world economy, whereas the economies in the old industrialized world have become sluggish. What is the future role of economies like those of the US, France or Germany?
Rajan: The traditional industrial countries have to be prepared for the fact that they will lose their natural advantages. Let me give you an example: When you're working for a fashion company in Milan, you just have to look outside your window to be inspired. But the new customers live far away -- in Shanghai, for example. That's where the demand is and where the designs will soon have to be created. Things will not be as easy in Milan as they once were.
SPIEGEL: So you're saying that Western companies will not only be moving parts of their production abroad, but also services?
Rajan: The central question is this: How can industrial companies serve the demand that is developed thousands of miles away? This is the great challenge for the coming years. I suspect that in such an environment protectionist impulses will get stronger.

Over at Financial Times, Martin Wolf explains how the global economic wars are being fought:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

Hey, Professor Bernanke, rev up those dollar bill machines :) 

Wolf adds:

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from abroad into emerging economies of more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital, albeit at a falling rate (see chart).
Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

WTF is all I can think now!