Central banks all over the world are flooding the zone with money hot off the press, all in the name of stimulus. Even a country such as Switzerland, with a traditionally stable currency and low inflation rates, finds itself caught in the dance. How can it afford to let the Swiss franc appreciate against the currencies of its commercial rivals? The powers-that-be in Switzerland have concluded that they can’t, and they may have a better excuse than Ben Bernanke et al., whose commitment to keep doing what isn’t working continues unabated.
Today’s Wall Street Journal carries a short article by Francesco Guerrera on the side effect of the running of the printing presses: “Currency war has started.” I actually think Guerrera is arriving on the scene a little late, but his article makes up in drama whatever it might lack in timeliness:
Most of the currency-market tensions aren’t the byproduct of direct intervention or trade wars but of extreme monetary measures that are attempts to make up for nonexistent fiscal policies.
As developed countries like Japan and the U.S. try to kick-start their sluggish economies with ultralow interest rates and binges of money-printing, they are putting downward pressure on their currencies. The loose monetary policies are primarily aimed at stimulating domestic demand. But their effects spill over into the currency world.
Since the end of November, when it became clear that Shinzo Abe and his agenda of growth-at-all-costs would win Japan’s elections, the yen has lost more than 10% against the dollar and some 15% against the euro. The greenback last week plumbed its lowest level against the euro in nearly 15 months.
These moves are angering export-driven countries such as Brazil and South Korea. But they also are stirring the pot in Europe. The euro zone has largely sat out this round of monetary stimulus and now finds itself in the invidious position of having a contracting economy and a rising currency—making Thursday’s meeting of the European Central Bank a must-watch event.
The dirty secret is that using monetary policy to weaken a currency, whether voluntarily or not, is a shortcut to avoid unpopular decisions on fiscal and budgetary issues.
“I don’t remember central banks being so deep in experimental mode,” says Mohamed El-Erian, chief executive and co-chief investment officer of Pacific Investment Management Co. “It is equivalent to a pharmaceutical company that feels forced to bring a new medicine to the market even though it has not been properly tested.”
How will it end? There are two binary results: apocalypse or redemption.
James Rickards, a veteran financier and author of “Currency Wars: The Making of the Next Global Crisis,” predicts the former.
“People ask me who’s winning. I say nobody,” he told me. “I expect the international monetary system to destabilize and collapse. There will be so much money-printing by so many central banks that people’s confidence in paper money will wane, and inflation will rise sharply.”
Now that’s something you don’t read in the Journal every day. Guerrera, however, is guardedly optimistic: “[C]ommon sense could prevail, putting an end to the dangerous game of beggar (and blame) thy neighbor.” Has counting on common sense to break out ever been a good bet? I’m thinking it might be time to pull down my copy of When Money Dies from the bookshelf.