It Does Not Exist, If We Say So

There is no currency war stemming from all the global quantitative easing, proclaims The Economist.  And if there was, it wouldn’t be bad.  The Economist’s Free Exchange columnist has written: “QE’s impact on its trading partners may be positive or negative; it depends on a country’s trade intensity, the substitutability between its and its competitors’ products, and how sensitive domestic demand is to lower rates. The point is that this is not a zero sum game; QE raises a country’s GDP by more than any improvement in the trade balance.

Writing in the Financial Times, BlackRock Vice Chairman Phillip Hildebrand argued “there is no such thing as a currency war.”  The former chairman of the Swiss National Bank wrote: “The monetary policy battles that have been fought and continue to be fought in so many economies are domestic ones.  They are fights against weak demand, high unemployment and deflationary pressures.  A greater danger to the world economy would in fact arise if central banks did not engage in these internal battles.”

Then why, one wonders, is the Group of Seven trying so hard to pretend there isn’t one or prevent one from growing. Meeting in London in mid-February, the G-7 published a statement: “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” The markets, reported the Financial Times, were “roiled” in the face of such reassurance. Apparently, the markets believe there is gambling going on in the casino.

It seems strange that some financial analysts should go to such lengths to proclaim that there is no gambling gone on in the casino.  Writing earlier in the Financial Times, Chile Finance Minister Felipe Larrain took a very different tact: “The surge of quantitative easy around the world should be a reason to worry for many emerging economies....Developed countries are acting to support their economies, but it is the emerging markets that have absorbed the bulk of the severe currency appreciation that follows every round of QE – and in particular those countries committed to flexible exchange rate regimes and open markets. This is particularly true in a world where China continues to manage its exchange rates.”

Whatever analysts call it and however they choose to suggest that it is an isolated case, the fall of the yen in recent months is clearly designed to be the foundation of Japan’s recovery from economic stagnation.  Even the Financial Times’ Martin Wolf called it “a beggar-my-neighbour devaluation.”  He added that “the policy will encourage more aggressive monetary policy elsewhere, which should be helpful to the world economy, if anything.”

Apparently, French President Francois Hollande has not gotten the message regarding the lack of a currency war as the value of the euro has appreciated.  “The euro should not fluctuate according to the mood of the markets,” Hollande told the European Parliament on February 5.  “A monetary zone must have an exchange rate policy. If not, it will be subjected to an exchange rate that does not reflect the real state of the economy.”

The temptation is to believe that central bank tinkerers can magically set the right exchange rates without other central bankers taking countervailing actions.  In advance of the G-20 meeting in Moscow, the Independent’s Russell Lynch reported: “IMF chief Christine Lagarde and Russia's deputy finance minister Sergei Storchak also denied the existence of currency wars, labelling recent swings in the yen as ‘market reaction to exclusively internal decision making.’” It sounds like the finance chiefs have decided to deny the obvious in hopes that the obvious will disappear.

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