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‘Beggar Thy Neighbor’ Leads to Currency Wars

Posted by Larry Doyle on February 14, 2013 6:56 AM |

The United States still has an official policy of pursuing a strong dollar, right?

Yes, right, and if you were to believe that, might I interest you in a bridge in Brooklyn?

The simple fact is that five years into our economic crisis, the major economic centers of the world, those being the USA, the EU, and now Japan are all employing the same central bank policy to support their economies. This policy of quantitative easing is an attempt to accomplish a combination of the following, with different emphasis depending on the region: 

1. compel investors to redeploy money into risk assets

2. monetize their debt

3. promote inflation

4. “beggar thy neighbor“, that is, devalue their currency in an attempt to promote exports and support their economy at the expense of their  trading partners.

What do we end up with? A lot of confusion and a regular drumbeat of conflicting statements put forth by central bankers. These statements remind me of a line often directed to Wall Street management and Washington politicians. That is, “how do you know when a Wall Street CEO, a Washington politician, or a central banker is lying?”

“When their lips move.”

Let’s listen to Pimco’s Mohamed el-Erian’s give his 2-minute take on how all these governments are pursuing the same policy.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • LD

    The key question to ask if whether emerging market governments would have been so critical of quantitative easing and the like if the policy mix of the industrialised countries contained more measures that offset the harm done by easing-induced currency devaluation? Arguably not. The root causes of today’s currency war lie not just in parochial monetary policy choice but in the backlash against fiscal stimulus packages and the political unviability of trade reform in the major industrialised economies. Pointing fingers at Japan misses the point. The responsibility for this latest outbreak of parochial decision-making goes much deeper.

    Root Causes of Currency Wars

  • LD

    It’s nice that the G-7 appreciates the dangers of currency war, but its Tuesday statement that “we will not target exchange rates” is a policy abdication. If the ministers really want to prevent “excessive volatility and disorderly movements” in currency markets, they would work together to coordinate their monetary policies to produce more stable exchange rates.

    But that would require financial leadership, especially from the U.S. Treasury. If his Senate confirmation hearing is any indication (see nearby), Obama nominee Jack Lew is a babe in the monetary woods. He’s likely to continue the real G-7 policy, which is every currency for itself, the weaker the better.

    Rumors of (Currency) War

  • Andrew

    The last Treasury Secretary that was honest about a strong dollar was Paul O’Neill. When John Snow was appointed, the dollar declined about 30% during his tenure. Each successor has continued along the same path.

    Add The Bernank to the equation and the Econ 101 texts can be recycled, as the information contained within is no longer relevant.

  • Jimbo

    We are the last who want a strong currency, w/8%++ out of work?

    I would reference a good George Schultz (remember him?) quote which has never been more prevalent than today, “watch what we do, not what we say.”.

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