With the cabal of central bankers and finance ministers once again denying at the G-20 meetings last weekend that the world’s largest economies are engaged in clandestine currency wars we are reminded of the famous Groucho Marx quote, “Who you gonna believe, me or your lying eyes?”
It should be self-evident to even the casual observer that the world’s largest central banks are engaged in currency wars. Pick up the morning paper and you are bound to see evidence of this.
From yesterday’s Financial Times:
“But the central bank governor, Graeme Wheeler, warned that the strength of the currency was harming exports and said the recent massive bond-buying scheme unveiled in Japan had contributed to the rise in the New Zealand dollar in recent weeks.
“The New Zealand dollar remains overvalued and is higher than projected in March,” he said.
“Further appreciation has occurred partly in response to the announcement of a substantial quantitative easing programme in Japan.”
“The high New Zealand dollar continues to be a significant headwind for the tradeables sector, restricting export earnings and encouraging demand for imports.”
The translation: Because Japan is debasing the yen, New Zealand must keep policy loose to prevent its dollar from soaring and hollowing out the country’s export sector.
When interest rates are pegged at zero and the transmission mechanism for monetary policy is impaired, the primary means for a central bank to stimulate growth is through the wealth effect (as dubious and temporary as that may be), and the export channel.
The problem with trying to revive economic growth by debasing your currency is that if all countries try to debase simultaneously, nobody wins—which is exactly what is happening today. The world’s largest central banks are on money printing binges to debase their currencies. The U.S. is printing at the rate of $85 billion per month. Japan is a close second printing $70 billion per month. The European Central Bank has promised to print more if things get uglier in Europe (they are) and the United Kingdom is widely expected to ramp up the printing presses if growth doesn’t pick up soon. The likely outcome of global money printing is a race to the bottom for the world’s major currencies. Hard assets, including gold (yes despite its recent correction) are your greatest ally in such a scenario.
Jeremy Jones, CFA
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