While Syria and Ukraine have the world worried about war, a much cooler war continues across the world. This is the one fought not with bullets or missiles, but instead with big wads of cash. The currency war that has swept the globe since 2008 is continuing on many fronts, as we have discussed before.
It’s time for an update. Who is winning the currency war? Right now, the answer appears to be Japan, but China has more than a few tricks it is working on. Europe remains a big loser and the US is pretty much holding even.
A currency war is what breaks out when nations start deliberately devaluing their money by printing it and running deficits. They do this in order to make their exports appear cheaper around the world. Think of it as a jobs program, something that has been very popular during the depression that has gripped the globe.
The net effect is similar to tariffs and other barriers to imported goods, except life is generally better for the average working person, as we’ve discussed before. There are two problems with this plan, however.
The first comes when all the money around starts to be come worth much less at home, causing prices to rise with inflation. At first inflation seems like a tax on the wealthy who have a lot of money, forcing them to put it to use. With time, however, inflation becomes large and hurts everyone while the rich put what wealth they have overseas.
The second problem arises when every nation starts to trash its own currency for a competitive advantage, setting off a currency war. That is happening across the world.
The big leader in this is Japan, which has lowered the value of the Yen by 19% since Prime Minister Shinzo Abe took office a bit over a year ago. While unemployment is down and Japan seems to be out of the doldrums it was in for 20 years, the clouds are already gathering on the horizon. Inflation in Japan is starting to pick up and workers are demanding more money all the time, keeping the cycle going. “Abenomics” is working, so far, but it can’t keep on forever.
Coming off of Japan’s devaluation is a Chinese devaluation of their own Yuan, which is proceeding at a typically Chinese pace – carefully and mysteriously. The central government has recently announced that the Renminbi (People’s Currency) will fall, but also become more openly traded in world markets – along with internal reforms. Rather than simply print more, the Chinese government hopes to become a “Reserve Currency” or the money that people around the world use to pay their bills. The two plans appear to go against each other, since being a reserve currency increases demand and drives the value of a currency up. Everyone will have to keep watching China to see what they do.
Through all this the European Central Bank (ECB) has refused to worry about exchange rates, acting instead to bolster confidence in the central currency that had to weather a lot of storms over the last few years. As a result, it is up 12% against the US Dollar over the last year, now at $1.37. It makes no sense at all, and Europe is not creating desperately needed jobs. By standing by while the currency war circles the globe, Europe is losing.
Other big losers include Argentina, Venezuela, and Turkey, which have all been hit with massive inflation that has destroyed their economies. They played the same game Japan did, but haven’t been able to pull it out at the last minute as you are supposed to. The problem with printing a lot of money is that the economy becomes addicted to it. Argentine and Venezuelan money wound up in Miami, seeking the safety of the US, as everyone else gradually becomes poorer.
Which brings us to the big player in the currency war, the US. As Brazil famously noted back in 2010, we have consistently had “cheap money” policies that have kept interest rates at zero and included $85B per month in “quantitative easing”. This is far below what the Fed should have targeted for economic growth. Why hasn’t inflation taken off? In part, the cheaper goods from Japan and China are keeping it in check for us, as has the discovery of a lot of oil here in the US. We have been free to print as much money as we want and largely keep pace in the currency war without suffering any consequences. Yet.
Who will win the global currency war? In the end there may be only losers if everyone keeps practicing the fine art of creating jobs by running the presses. What we do know is that there has to be a new global currency regime at some point if this keeps up. So far, only China seems to have an eye towards that. So if you want to place your bets they have to be the favorite.