In recent weeks, we have highlighted the escalating phenomenon of currency wars and a growing sense of desperation among nations. Countries are striving to boost their economies by devaluing their currencies, but when every nation is engaged in this practice, the competitive edge of cheaper exports is quickly undermined.
Despite the evident madness of this approach, countries seem intent on pursuing it. Last week, we saw fresh indications that states are bracing for a relentless race to the bottom…
“Japanese Prime Minister Shinzo Abe has invoked the term “regime change” as he seeks a new perspective at the Bank of Japan (BoJ),” reports The Economist. “His ambitions might be realized sooner than anticipated, as on February 5th, Masaaki Shirakawa, the bank’s governor, declared his intention to resign nearly three weeks earlier than scheduled, on March 19th.”
Abe is pushing for aggressive monetary easing (i.e. extensive money printing) and a weakened yen. He believes his economic strategy, termed “Abenomics,” will revitalize exports and lift Japan’s economy from a two-decade downturn. Will this approach succeed?
The outcome remains uncertain. However, history shows that such financial maneuvers rarely unfold as planned. They often result in economic distortions, misallocations of resources, and unwelcome financial bubbles. Nonetheless, we are about to witness the unfolding of the grand Abenomics experiment…
Tomato Currencies
“It is almost guaranteed that whoever succeeds Masaaki Shirakawa as head of the Bank of Japan will intensify monetary easing compared to their predecessor,” states Reuters. “With interest rates already nearly at zero, the BoJ has embraced policies that inject liquidity into the economy.
“The central question is how far the new BoJ leader will be willing to venture into unchartered policy territory in response to Abe’s call for an aggressive strategy to lift Japan out of persistent deflation and its fourth recession since 2000.”
Here at Economic Prism, we’d enthusiastically embrace the chance to buy a brand new Lexus for just $15,000. Frankly, at that price, we’d consider purchasing two. Yet, we remain skeptical that such a price will ever materialize.
What Abe seems to overlook is that the global economy is dynamic, not static. The reason a Lexus will never be priced at $15,000 is simple: as the Bank of Japan devalues the yen, the Federal Reserve will likewise devalue the dollar. Though these devaluations won’t occur simultaneously, there will inevitably be times when one currency outpaces another. Over the past three months, for instance, the yen has depreciated by 15 percent against the dollar.
However, in the long run, these currency devaluations will eventually even out. Unfortunately, this will lead to the swift erosion of the savings of citizens in each country, especially when compared to commodities and assets that cannot be artificially inflated. The rapid decline in currency value will be reminiscent of a tomato’s speedy descent from ripeness to rot. One moment it holds value; the next, it’s worthless.
The Great Money Caper
To complicate matters further are the many players involved in this financial charade. It’s important to remember that it’s not just the Federal Reserve and the Bank of Japan engaged in these monetary skirmishes. Central banks like the European Central Bank, the Bank of England, and the People’s Bank of China are all gearing up for battle.
Just last week, European Central Bank President Mario Draghi made headlines as he downplayed the euro’s value. But this is just the beginning…
Meanwhile, in the United Kingdom, the Bank of England has recruited a Canadian to tackle its challenges. Yes, you read that correctly. Later this year, Mark Carney, currently Governor of the Bank of Canada, will assume the position of the Bank of England’s head, making history as the first foreigner to hold this role in 318 years. He supports the idea of “opportunistically raising the inflation target.”
Lastly, the People’s Bank of China is a seasoned player in global currency manipulation. They have even enlisted Chinese corporations for assistance. Just last Friday, for instance, Chinese firms purchased dollars, causing the yuan to lose value. Evidence suggests that the People’s Bank of China orchestrated these purchases.
In the United States, the Federal Reserve is a prominent participant in this financial debacle. After increasing the nation’s monetary base by $3 trillion over the last four years, the Fed is set to add another $1 trillion to its balance sheet this year alone. Furthermore, they won’t cease their efforts to weaken the dollar until the unemployment rate drops to 6.5 percent.
As evidenced, money—yours included—is facing an assault globally. Central banks worldwide are fully committed… The grand money caper has commenced.
Sincerely,
MN Gordon
for Economic Prism