The funny thing about currency devaluation is that it is very easy to disguise. Seriously. You only need to look at US Federal Reserve’s quantitative easing policy to see this in action. The net result of the quantitative easing was to depress the price of the dollar. This made US exports attractive and boosted industrial production and export growth. It is no surprise then that many analysts are crediting quantitative easing with finally getting the US economy out of the woods.
The American experience with quantitative easing was not lost on Japan and the European central bank. After several years of political indecision, these major global economic powers finally got on the quantitative easing bandwagon. Not surprisingly, Japan’s famously deflation-plagued economy has shown convincing signs of life. Inflation is no longer a PowerPoint presentation among economic planners in Japan. It has become a reality. While the inflation rate in Japan isn’t as high as economic planners would like, it is definitely getting up there. This again provides evidence that quantitative easing does work.
Unfortunately, as effective as quantitative easing might be, it triggers currency wars. There are really no two ways about it. We are embroiled in a currency war, and the greatest casualties are, of course, American multinational companies whose products and services look less attractive because they are priced in dollars. Now that the US Federal Reserve has been making some noise regarding interest rate hikes, the US dollar continues to shoot skyward as more and more investors from Japan and the European union snap up US dollars because their own central banks have negative interest rates. Put these all together and it translates to a solid currency war.
It doesn’t really matter what the motivation is. Whether you are talking about spurring an economy back to life or pump-priming economic activity, the end result is the same. Currencies get depressed and, as a result, the products generated by the economies behind those currencies look more attractive. There has been a lot of back and forth regarding currency manipulation and currency wars, but the reality of the situation is that we should focus on the net result and not the publicly proclaimed motivations behind economic policies.
