Many government officials around the world are concerned that massive monetary easing in numerous nations is sparking a global currency war.
Governments from Germany, to Russia, to Brazil, to Thailand have expressed worry that the world is plunging into a currency war, Bloomberg Businessweek reports.
The current focus is on Japan, where the central bank this week announced it would increase its quantitative easing and also set a target of 2 percent for inflation.
Before the Bank of Japan even revealed its policy, Bundesbank President Jens Weidmann warned Japan against politicization of monetary policy that would lead to a weaker yen.”A consequence [of government pressure to ease], whether intended or not, could lead to an increasingly politicized exchange rate. Until now, the international monetary system has come through the crisis without a race to devaluation, and I really hope that it stays that way.” Loosening monetary policy often depresses a currency by lowering interest rates and boosting inflation, thus making the currency less attractive to global investors.
Governments frequently pursue a weaker currency in times of economic stress to boost exports. But one country’s devaluation often begets another, raising fears of a currency war.
History gives reason for concern. A “beggar-thy-neighbor” policy of global currency devaluations helped spark the Great Depression that began in 1929.
Hedge fund icon George Soros, chairman of Soros Fund Management, certainly is worried. “I think the biggest danger is … a currency war,” he tells CNBC.
However, not everyone objects to the global central banks’ easing moves, seeing them as necessary to spur growth. “If these are currency wars, we need more of it,” Barry Eichengreen, an economist at the University of California, Berkeley, tells Businessweek.
In the United States, the Federal Reserve’s accommodative policy has a staunch defender in Soros. “You need to re-establish growth for shrinking the debt,” he says. “And so, I think the policy pioneered by [Fed Chairman Ben] Bernanke is actually the right policy.”
In Japan, some say that monetary policy still isn’t stimulative enough to boost the moribund economy.
“The best of all worlds would be if all central banks agreed to give more support for growth,” Eichengreen says. “But uncoordinated action is better than no action at all.”
Interestingly enough, when it comes to currencies, they haven’t fallen in most of the biggest nations that are easing. The Dollar Index, which measures the greenback against six other major currencies, has actually risen a bit since shortly after the Fed began its quantitative easing in November 2008.
The British pound is little changed against the dollar since the Bank of England began its QE2 October 2011. QE hasn’t hurt the euro either, according to The Wall Street Journal.
With so many central banks easing at once, the currency effect of each country’s easing has been nullified. And economies have been weak enough to keep inflation from rearing its ugly head.
To be sure, the yen has plunged to a 2 ½-year low this week, but some experts don’t think the decline will last.
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