Low interest rates and deficit spending can goose a slow economy, often trashing the value of the currency and making exports appear cheap. But sometimes this policy looks like a type of war.
“We’re in the midst of an international currency war,” Guido Mantega, the Finance Minister of Brazil bluntly told an industrial trade group in September 2010. “This threatens us because it takes away our competitiveness. The advanced countries are seeking to devalue their currencies.”
His remarks came in response to the Federal Reserve’s policy of zero interest rates, which it adopted in 2009.
The charge sounds ominous, but it is really the continuation of the game that nations big and small have played for years to protect jobs — lowering currencies to keep exports cheap.
Developed economies deny it is a global conflict for trade superiority.
“Most of the exchange rate movements that we have seen were not explicitly targeted, they were the result of domestic macro economic policies meant to boost the economy,” Mario Draghi, the head of the European Central Bank (ECB), calmly told reporters in February after cutting interest rates. “In this sense, I find really excessive any language referring to currency wars.”
So, is this a war or merely prudent policy to stimulate growth?
The question became much sharper in 2013 with the arrival of “Abenomics,” the economic policy of Japan’s Prime Minister Shinzo Abe, who was elected on a platform of action to end a near 20-year slumber for Japan.
“We will put an end to this shrinking and aim to build a stronger economy where earnings and incomes can grow,” Abe said shortly after taking office in January 2013. “For that, the government must first take the initiative to create demand and boost the entire economy.”
Immediately, $113 billion was pumped into infrastructure and other public investments.
It accelerated when Abe appointed Haruhiko Kuroda as the head of the Bank of Japan. A long-time critic of the bank’s policy of stability, Kuroda was picked because he favored strong, decisive action.
“Speed is of the utmost importance,” Mr. Kuroda told a parliamentary hearing. “I intend to pursue bold monetary easing, both in scale and in quality.”
Since Abe’s arrival, the Japanese yen has depreciated 22 percent against the U.S. dollar, effectively making Japanese products 22 percent cheaper to us.
This alone does not constitute a currency war. The response to Japan’s moves — especially by neighboring nations that have to compete with Japan to maintain their own jobs — have made it an international conflict.
“Compared to the North Korean risk, a sliding yen is having a considerable impact on the real economy of South Korea,” said South Korean Finance Minister Hyun Oh Seok in May 2013. “Japan’s economic policies are doing their part to help the world economy recover. But if this causes problems, and then the problems cause new responses from partnering nations, for example a currency war, the world economy will have a hard time.”
China has never been shy about keeping its currency, the yuan, or renminbi (“people’s currency”), low. Yi Gang, head of China’s central bank, said of the Japanese policy last year that, “China is prepared. In terms of both monetary policies and other mechanisms, China will take into full account the quantitative easing policies implemented by central banks of foreign countries.
Since that time, China has become more aggressive. The yuan has slid 2 percent so far this year in what appears to be a deliberate move by the central bank.
With each nation doing what it can to stimulate growth, can we really say that this is a “currency war,” or the deliberate targeting of lower exchange rates to make exports appear cheaper? Central banks generally downplay that this is a general policy, and major investment banks are also more focused on the process of jump-starting economies internally rather than the net effect on global trade.
International investment bank HSBC, long a link between East Asia and the West, said in an uncredited note to investors, “It’s a monetary version of currency wars. Rather than removing deflationary trends, monetary stimulus merely allows central banks to export deflation to other parts of the world.”
Essentially, all politics are local to the central banks who are only trying to get their own economies moving and stop the tendency towards falling prices. The resulting global conflict is simply a side effect.
“If unconventional policies work primarily through the exchange rate, they serve primarily to export, rather than cure, disinflationary pressures,” HSBC said. “It’s increasingly apparent that one country’s monetary stimulus is another’s ball and chain.”
Economist Paul Krugman, writing for the New York Times, explained why deflation is a serious problem: “When people expect falling prices, they become less willing to spend, and in particular less willing to borrow. After all, when prices are falling, just sitting on cash becomes an investment with a positive real yield.”
A cycle of deflation is the real hallmark of a depression, distinct from an ordinary recession. It is what central banks are genuinely focusing on more than global trade.
That doesn’t mean the net result isn’t the same, however. The problem is that demand is not high enough to fuel the level of consumption necessary to keep everyone employed. In order to boost consumption, nations are pursuing inflationary policies largely by borrowing money and keeping interest rates low. But they can’t borrow forever.
“That’s where Western governments are. They’ve run out of the ability to borrow money to finance their current consumption,” according to John Mauldin, international investor and author of the book “Endgame,” which focuses on where the “debt supercycle” will ultimately lead international banking.
“It’s going to end in the next 2 or 3 years, Europe first, then Japan, then the US,” he told King World News. “Hopefully we (the U.S.) don’t end by becoming Spain and hitting the wall and losing access to the market, without the central bank massively funding ourselves and watching interest rates rise.”
Is there a global war being fought with big wads of paper rather than missiles and troops? While such a policy may not be deliberate, the process we see unfolding is largely the same.
Like a more conventional type of war, it may exhaust the reserves of nations all around the globe before it finally grinds to a halt.