“Currency War” is the most recent buzz term in the financial media.
The dramatic term is sure to raise anxiety. But what does this term really mean, and is this ominous terminology really indicative of current events?
A currency war takes place when nations take deliberate actions to devalue their own domestic currency in an effort to gain an economic advantage over other nations.
The advantage sought by reducing the value of one’s own currency can come in the form of lowering the relative price of a country’s exports, or sometimes can come in the form of repaying debts to other countries in a currency that is worth much less than it was when it was originally lent.
When nations take deliberate actions to devalue their currencies, the risk is that counter-party nations make take retaliatory actions leading to a veritable “race to the bottom” of currency values. This race to the bottom inevitably causes economic and social stress and has resulted historically in actual military conflicts among competing currency warring nations.
I know, this sounds bad, but when I look at recent events I also believe the use of the term is a bit misapplied in the current situation.
The term was ignited recently when a new government was elected in Japan. The new government openly stated it would support Bank of Japan policies to reduce the value of the yen, which caused other nations in the region to cry foul. Pundits everywhere then reminded us the U.S. Federal Reserve has been actively debasing the dollar since 2009 with programs like zero interest rates and Quantitative Easing (money printing), and the currency war was apparently on.
But we’ve talked about Japan in this column before. They have serious economic problems involving a huge national debt and stubbornly slow economic growth. And guess what? So do we.
Due to disastrous budgets, governments in both nations have run out of economic bullets and have turned to their central banks for monetary policy focused on stimulating economic growth. The result is aggressive monetary policies that could lead to currency devaluation.
To me, however, these aggressive and untested central bank policies in the U.S., Japan and Europe look less like competition and more like collaboration. Each nation/region is a fiscal mess, and is experiencing slow growth. The economic theorists hope by printing more and more new money, economic activity will eventually pick up. A convenient side effect happens to be that when interest rates are kept artificially low it makes the massive public debt in these nations easier to carry.
So instead of a race to the bottom we seem to have more of a choreographed dance as desperate governments move together to take whatever they can from the rest of us, including the very value of our money.