Governments Release Dogs of War in Epic Battle to Devalue Currency

December 27, 2012 4:52 PM EST
It's official. The U.S. is at war and its enemy is the entire world. Or, more precisely, the U.S. is at war with the currencies of the world. Not to be outdone, Japan’s armies have a new general and it is prepared to launch a massive offensive. Meanwhile, China's battle hardened strategy has not changed, as its plans to keep the dollar within its predetermined trading band. Europe, for its part, has largely given up on ill fated plans to be fiscally responsible and they too are firing up the presses, drafting armies of Euros as they attempt to stem losses from an earlier campaign.

Dramatic? Yes. Over the top? You bet. True? Unfortunately.

A quote from WSJ dated December 27th:

"What has been a building theme for some time, central bank intervention in the markets, is going to go into overdrive in 2013, with the brewing currency war among the major central banks as each tries to devalue its way to prosperity."

An extension of Japan's multi-trillion yen asset purchase plan, orchestrated by its new Prime Minister, Abe Shinzo, stole headlines this month, leading to a massive rally in the USD/YEN. While this was the latest salvo in the war, it was not an opening shot, per say. This was a response to Fed's QE4, which itself was a response to weak economic growth. Some would say this weak growth is largely related to the outsourcing of jobs to China and other emerging market economies, which created massive global imbalances and an eventual credit freeze. This, again, has roots in currency imbalances.

In a global economy, all things being equal, like water running downhill, jobs flow to the country with weakest currency. In a world of increasing production inefficiencies, tight credit, and reduced spending those jobs are of limited supply.

Of course, there are limiting factors on government efforts to create jobs through debasement. These limits include inflation, fear of inflation, faith in a government's ability to pay debt, and political will, among others.

Unlike previous wars, the currency fight has no declaration of war, and many doubt its existence. Nonetheless, it may prove to be a central theme heading into 2013 and throughout the year.

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