French president Francois Hollandes statement saying that the euro should not fluctuate according to the mood of the market; the complaint by Eurogroup president Jean-Claude Juncker about the euro being dangerously high; and the Bank of Japans recent decision to weaken the yen with aggressive quantitative easing confirm what we already knew: The world is at monetary war.
Officials at Russias central bank recently called it exactly that, and Brazils government has been warning about it for quite a while. Speaking for a host of emerging countries in an op-ed piece in the Financial Times, Chiles Finance Minister cried out against the devaluation of the currency in rich countries. But it may be too lateemerging countries themselves are buying US dollars frantically in order to prop up the greenback and push down their own currencies.
Open Protectionist Confrontation
What does it all mean? Essentially that, just as in the 1930s during the Great Depression, everybody is in open protectionist confrontation against everybody else. Back then the beggar-thy-neighbor policies started with the Smoot-Hawley Tariff Act of 1930. This time responsibility for triggering the devaluation race in the developed world is more widespread but the objective is similar to that of tariff policy in the 1930s.
The headlines in the wake of the bursting of the bubble in 2008 seemed to indicate that the world had learned the lesson of protectionism. Every important leader said their country would not seek an end to the crisis by using artificial methods to gain competitiveness. But this is exactly what they did. Although in several cases they raised tariffs directly or indirectly, the preferred way was to debase the currency through inflationary expansion. One way to measure the impact, for instance in the case of the US dollar, is to track the price of goldwhich has doubled since 2008.
The US was not the only culprit. Many others joined the party. But until now these beggar-thy-neighbor policies had not translated into open political bickering among allies. This has changed in the last few days, probably because of the dramatic start to Shinzo Abes government in Japan. He has pressured the Bank of Japan to inflate the yen (its value has dropped in a matter of days), while announcing, at the same time, a ¥10.3 trillion fiscal stimulus. Another factor in bringing the fight into the open may be that the effects of money creation are now being felt more acutely around the world. To judge by the voices calling for a weaker euro, this will continue.
Masochistic Way to Become Competitive
Devaluation is a masochistic way to try to become competitive since it consists of hurting oneself. In theory, by devaluing the currency you export more and become richer. In reality, you import less because imports become more expensive. In order to purchase what you used to buy before debasing your currency, you now need to export more (the purpose of exports is to pay for imports, not the other way around.) In any case, the prosperity is short-lived because eventually domestic prices go up and so does poverty...
A few heroes are keeping a cool head amid all the insanity. Let us hope they can resist the pressure. Among them is Jens Weidmann, the top guy at Germanys Bundesbank, who has sternly warned against the monetary escalation. Other sensible voices, in true poetic justice, are coming out of the emerging world, which is now in a position to lecture those by whom it used to be lectured. But it wont be enough. These policies tend to be an easy sell with the public and by all indications they are already popular. This could easily be another chapter in Charles Mackays Extraordinary Popular Delusions and the Madness of Crowds.
|Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His Independent Institute books include Global Crossings: Immigration, Civilization, and America, Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America.|