Currency Wars explained
“iN ACTuAL FACT, MANy CouNTRiES HAvE BEEN DoiNg JuST THE REvERSE AND ENFoRCiNg AuSTERiTy oN THEiR PoPuLACES THAT iS SiMPLy MAkiNg THiNgS EvEN WoRSE.” Governments around the world have tried literally everything in the economic textbook to boost their economies, but due to the huge public debts that they had accumulated over the last 20 years, they have not been able to apply the necessary fiscal measures to boost internal demand that traditionally would have been used. In actual fact, many countries have been doing just the reverse and enforcing austerity on their populaces that is simply making things even worse. Under the current environment, central banks have been substituting the usual fiscal levers of government that would be expected to be applied, and are throwing everything they have on the monetary side at their domestic economies in an increasingly desperate attempt to boost demand and create self sustaining growth. So far this is proving elusive. The use of such monetary policy tools is aimed at boosting GDP through primarily external demand (i.e. exports) at the expense of neighbour countries in what is known in economic literature as beggar thy neighbour policies. With the Japanese yen devaluing by some 22% against the euro in just three months and with the euro appreciating against pretty much every currency, it is safe to say that a currency war has started in earnest.
THE FouNDATioNS FoR A CuRRENCy WAR A “currency war” is essentially a competitive devaluation of a country’s currency relative to others or against a basket of currencies in an attempt to boost exports (external demand) and so add impetus to that country’s industry.
It is, traditionally, the easiest way to become competitive. Instead of cutting wages and jobs as Portugal, Greece, and Ireland (imposed by the Troika) have, countries sometimes try to just lower the value of its currency in order to make its products become more attractive at a price point. It usually works too and creates a new wave of economic growth, albeit at the expense of that countries purchasing power (higher cost imports for example). This type of economic warfare often results in retaliation by other countries to prevent themselves being negatively affected by those policies. It is thus all too easy to understand how workers in Portugal, Greece, Spain and others inside the Eurozone currently feel, given that they have now endured almost five years of extreme austerity measures and now see their efforts thrown through the window due to the euro appreciation...
A “CuRRENCy WAR” iS ESSENTiALLy A CoMPETiTivE DEvALuATioN oF A CouNTRy’S CuRRENCy RELATivE To oTHERS.” FRoM CRiSiS To CuRRENCy WAR The currency war started in 2008-09, even though at that point the main goal of central banks was simply to try to contain the financial crisis that was just gathering pace rather than trying to influence exchange rates. One way or another, however, monetary policy always influences exchange rates and when it is extremely expansionary, as it is now in most countries, it ends with winners, and losers... During the last few years, central banks have used monetary easing, lower interest rates, currency floors/caps, capital controls, direct market interventions and even verbal interventions in attempts to fix internal demand problems.
March 2013
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