No One Will Win a Currency War
I see lots of people discussing how “successful” Japan’s strategic decimation of the Yen has been so far. They mainly just cite the Nikkei’s enormous rally as “proof” that all’s well that begins well. Of course, that’s not always the case when you’re using a nominal wealth metric to describe how the real economy is responding. Remember, the stock market is not the economy. It is essentially the guesses of a group of semi-intelligent half apes who all think they’re smarter than one another.
Anyhow, the more important point to understand is that a currency war will likely end up with no winners. This isn’t a poker table where one central bank happens to be much better at the game than all other central banks. This is a poker table with a whole punch of very powerful silver backs who are all on relatively equal footing in aggregate.
Let’s just take a look at how this could all unfold for instance. So, Japan has been talking down the Yen and everyone sees how well that’s working. Then the ECB decides they also want to stimulate their economy by driving the Euro down. So the dollar goes up relative to the Yen AND the Euro. And the Fed looks around and sees the economy weakening and says “wait just a minute here fellas”. And then the Chinese start seeing the RMB rise relative to the Euro and say something like “we would like to ‘help’ the European people out with their debt crisis so we will stabilize their currency”.
You can see the merry-go-round at work here. Everyone can’t devalue. So, this works great for Japan so long as everyone else lets them just sit around and have their way with the currency. But a currency war won’t end well for anyone. But if you have to sit at the table with the other apes you might have no choice but to engage them in their fruitless battle….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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12 Comments
It’s a beggar thy neighbor policy – but, they have been on the receiving end of the currency equation for the best part of the last decade. It used to be almost 150 yen to the dollar – remember those days?! There are of course natural limits; but the rally is itself perfectly rational, as long as, as you say – EUR deval, USD deval etc don’t follow. Then again – how is anything they’re doing terribly different from what the US has been doing? So, what we have here is act 2 of a currency war that started in 2009. The trouble is manipulated currency systems keep leading to wider and wider trade imbalances, which are the actual starting point of almost every modern day crisis. But, perhaps that’s a different topic altogether.
Two sides to every trade. When will the world start realizing that if you’re not on the winning side you’re on the losing side.
A currency war looks very possible here with the Japanese firing the first shots.
It’s not 100% beggar-thy-neighbour, more to the order of 90-95%. In terms of financial/monetary conditions, exchange rates naturally cancel out, making this a beggar-thy-neighbour game mostly inducing real economic volatility stemming from currency effects.
Real exchange rate movements actually impact quite substantially on both relative sentiment and relative “hard data”, given time-varying lags (depending on hedging policies and so on).
That said, if currency devaluations come about due to rate cuts or increased QE, it should be boosting global monetary conditions, hence not fully constituting beggar-thy-neighbour polices.
This doesn’t change Mr Roche’s conclusions. I would look into medium-term anti-KRW strategies at this juncture…
“So, Japan has been talking down the Yen and everyone sees how well that’s working”
I assume you mean it has driven down the value of the yen, not necessarily that it has helped the Japanese economy. The jury must surely still be out on the latter. . .
To me it’s as clear as daylight: continuous central bank devaluation of currencies over the long-term, continuous upward pressure on gold prices over the long-term. No brainer.
Maybe I don’t have a brain, but I fail to see the connection.
Not surprising. Most intelligent investors fail to make this connection. You’d be surprised how much you learn by reading into the monetary history of advanced economies over the past few hundred years…
I wonder if the part that they think they’re smarter than one another, works for other comunities than the financial market as well, incredible how that’s a rule.
currency wars it’s an “uglyness contest”, maybe when the supply side of the economy it’s more tight it avoids it from happening?
But what if the currency war leads Europe to looser fiscal policies (adding nfa in euro), in order to counter the Japanese, wouldn’t that be exactly what the doctor ordered against the austerity that is wearing us down over here?
Currency wars are a little like central banks on HFT. That is they try to use one tool (currency depreciation) to win an advantage,but the advantage is short lived because if the tool is widely availabe and used then the advantage eveporates too quickly to make any ongoing difference in performance. All of the scenarios where currency depreciation has actually wrought an ongoing competitive advantage are where the depreciation was actually via formal devaluation and of course where these were done in isolation. I am not aware of one incidence where so many major trading powers were in deficit and required a competitive trading basis where currency depreciation has worked to gain an advantage.For this reason I thought the whole Japanese issue was borderline stupid other than for what it might do to an intermediate trend in risk taking. In other words,momentum players paradise,but not to ber confused with investment rationale. The latter would need to see Japan reform structurally.
As a dscussion point I would say that multiple currency wars have a natural eventual outcome in exchange control policies…think about it.
Cullen, you demonstrate your ignorance by including the Euro in this post.
Clearly you don’t grasp how the ECB works at all.
Shame, another of your many blind spots.
PS….gold owners win the currency wars, remember that.