26 September 2013, 15:31

Ben Bernanke restarts the currency wars

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One of the negative consequences of US Fed’s monetary policy is the restart of global competitive currency devaluations also known as “currency wars”. The recent decision to cancel the reduction of liquidity injections in the US markets, made the central banks of the world think about countermeasures and “defensive policies”.

Financial experts and policy makers expected a “tapering” of the Fed’s bond buying program in September and were caught by surprise by the Fed’s decision to postpone the tapering until there is further proof of sustainable economic growth. Now, countries like Brazil, Australia and Japan are afraid that a weaker dollar will hurt their exports.

Boris Schlossberg, managing director BK Asset Management, told CNBC that “We are on the verge of a currency war... especially if the Fed does not taper in October or December”. He added that the only efficient countermeasure available to other countries is the implementation of "even more accommodative policies in order to try and equalize all these currency differentials".

Evan Lucas, market strategist at IG, said he expected other major central banks to start their own interventions in the currency market in order to prevent an excessive strengthening of their currencies against the dollar. All major exporting economies are vulnerable to currency risks. A rising domestic currency makes their export uncompetitive, hurts their GDP and current account balance. Bank of Japan has done tens of currency market interventions in order to weaken the yen and restart the growth of Japanese exports. Because of the US Fed’s policies, the Japanese central bank will have to start almost from scratch.

The main negative aspect of the currency wars is the creation of a vicious cycle of competitive devaluation. Attempting to save their export industries from collapsing, the world’s central banks hurt the savings of their retirees and destroy the purchasing power of their citizens. Currency debasement inevitably leads to social crises. There can be no winner in a global currency war and its final chapter is likely to be a worldwide currency crisis. Jim Ricards, a former CIA advisor and investment banker, summed up the best long-term strategy for countries engaging in currency warfare: “the only winning move is not to play this game”.

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