Tuesday, 12 February 2013

WORLD: '' Currency-War'': A "tsunami" of cheap money to boost economies

Central banks around the world are trying to cheapen their currencies in order to boost their economies. This is making the euro more expensive and endangering the recovery of Europe's stricken economies. But the European Central Bank is resisting growing calls to join in the currency war.
 
The European Central Bank chief is coming under increasing pressure because he can't quite bring himself to embrace the concept of quantitative easing, the latest fashion in the world of finance. It involves central bankers engaging in the large-scale purchase of bonds issued by their governments and other securities, thereby injecting huge sums of money into the financial system.

In this way, they hope to stimulate the domestic economy and keep their own currencies cheap, thereby strengthening exports. But a country that artificially pushes down its exchange rate is obtaining competitive advantages at the expense of others. And if they manipulate their own currencies, all sides will end up losing out.

Japan has taken the most aggressive approach so far. Under pressure from the newly-elected government, Masaaki Shirakawa, the governor of the Bank of Japan, has announced plans to buy up unlimited amounts of government bonds and securities in the future. The country is in the process of "boldly rebuilding" monetary policy, Prime Minister Shinzo Abe declared. Indeed, the Japanese yen has lost 12 percent of its value against the dollar in the last two months.

The US central bank, the Federal Reserve Bank, has also been printing money to a previously unimaginable extent since the financial crisis. Calling its efforts QE 1 and QE 2, the Fed has pumped more than a trillion dollars into the US economy.

For years, China has defended its currency by pegging the exchange rate to the dollar, and the Swiss National Bank now only permits appreciation of the franc up to a certain limit, because investors have viewed the Swiss currency as one of the last safe currencies since the outbreak of the sovereign debt crisis in Europe.

A "tsunami" of cheap money is rolling across the world, Brazilian President Dilma Rousseff said more than a year ago. The consequences are disastrous for emerging economics like Brazil, because their currencies steadily appreciating in world markets.

Europe could end up as one of the big losers. Since the euro crisis has abated a little, the exchange rate for the common currency has appreciated, which could thwart an economic recovery in the continent's crisis-stricken countries.

In theory, central banks are supposed to fight inflation. ECB President Draghi doesn't want to take part in the global depreciation race either. He sees no reason for a change of course, he says, "just because other central banks are changing."

There is probably only one solution to the problem: an international peace treaty between the generals in this new war, the international central bankers.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist

Photo-Credit: Wikip├ędia. ECB President: Mario Draghi