Where is All That Central Bank Muscle?
Japan Follows U.S. and Europe in Stimulus Moves; Other Actions Expected
So reads the headline of a recent, rather long, Wall Street Journal article. The authors jump from country to country showing us how the central banks of the U.S., Japan, Euro-zone and UK are pumping "massive injections of stimulus" into the world's economies.
Meanwhile, central banks in countries like Brazil and other emerging market countries are furiously weakening their own currencies. They're worried that all this massive stimulus (read: money created out of nothing) will head for their shores, driving up the value of the local currency. And if that happens, then their exports will cost more, which will have a negative effect on those exports.
So what's new?
The emerging markets drive down the value of their currencies to keep their exports cheap. Learning their lesson from China's export success, they've been doing this for years. The only thing different now is that they're intensifying those efforts based on a perceived threat created by the major central banks creating all this "stimulus."
The process of every country driving down the value of its currency - first one, then another, then another - is known as "competitive devaluation." Each country competes to devalue its currency more than the next. The article claims that these countries want to avoid a full-blown "currency war." But that seems hardly possible. The world-wide money-pumping is like an massive assault on these smaller economies and their efforts to devalue their own currencies are defensive in nature. Sounds like war to me.
(Read the whole article by clicking HERE.)
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