It was the best of times. It was the worst of times. Choose which.
The IMF’s Christine Lagarde welcomed the Bank of Japan’s enormous money printing program as a “step in the right direction”. But Hongkong’s South China Morning Post said that China’s leading economists are “furious”.
One disgruntled economist even accused the BoJ of “monetary blackmail” and called on the Chinese authorities to retaliate in kind … Chinese economists regard this policy as a devious attempt to drive down the value of the yen, and so boost the commercial competitiveness of Japanese exporters compared with their rivals in China.
If Lagarde thinks Japan has saved the Global Economy, Chinese economists by contrast painted the Japanese move as the first shot in a global currency war that “will doom other nations”. “Liu said Japan’s unprecedented easing programme, aimed at ending more than two decades of deflation, was ‘a monetary blackmail’ targeted at other export-driven Asian countries such as China and that the central bank should sell more yuan and buy the US dollar to push down the yuan.”
Among the possible doomed, according to the Financial Times, is Korea. “South Korean officials are particularly sensitive to Japan’s recent monetary stimulus, which has brought a significant drop in the yen’s value. The Korean won has gained about 6 per cent against the yen this year after surging more than 20 per cent last year, threatening Korean manufacturers’ price competitiveness against Japanese rivals.”
Even before the BoJ fired its salvo the Koreans were rattling their sabers. “South Korea is preparing to fight ‘speculative’ investors betting on the won, as the currency’s appreciation against the US dollar and the Japanese yen erodes Korean exporters’ competitiveness.”
Are we watching the unfolding of a currency war? The Telegraph delving into history notes that ”in the Great Depression of the 1930s, currency wars became common, with nations effectively competing to export unemployment. However, global trade declined sharply as fluctuating exchange rates harmed international traders, hurting all economies.”
Humayun Shahryar of Auvest Capital Management suggests that the handmaidens of currency war – trade war and protectionism – are already present. The reason is that once someone exports job losses, everyone exports job losses. Soon the whole exercise fails and barriers go up.
In a fiat currency system it is increasingly difficult to devalue a currency if everyone tries it at the same time, as demonstrated by the fact that most major currency pairs have not moved much on an average over the last four years as a result of constant interventions through quantitative easing and other actions by central banks.
Frustrated by this failure, the Swiss National Bank and the Bank of Japan have fired the first open shots and others are likely to soon follow suit as falling global trade leads to a rise in protectionist sentiment across the globe. Once central bank action fails in this covert trade war through currency manipulation and bank bailouts, governments will be forced to take direct action through subsidies, tariffs and other trade barriers. References to currency wars will soon be replaced with trade wars as global imbalances come to the forefront again.
But in recent years, the amount of money flowing across borders has drastically decreased. According to a new report, this represents a drastic shift away from international commerce, with localized markets more dependent on domestic consumption for growth. It could mark the end of modern globalization …
According to McKinsey, there are two possible ways forward. In the first scenario, countries would becomes isolationist, continuing to retreat from international capital markets and concentrate on domestic growth …
McKinsey’s second option: financial institutions and policy makers will have to put a regulatory system in place to prevent catastrophes like the 2008 crisis. These regulations would allow money to move across borders more efficiently and with less risk.
All of these scenarios predict that the party is over. Either walls go up or the gates and conditions of entry become negotiated. Either way happy days will not return for a long time. If history is any guide the nations of the world must go through a long period of re-adjustment before a new period of growth becomes possible. In the meantime there will be a lot of belt-tightening and adjustment, and the countries will fare according to their resource endowments, population and skill.
President Obama seems destined to face a crisis like one of his storied predecessors. Which crisis? Ah there’s the rub.