While traditional wars result in excessive physical carnage, currency wars don’t generally result in bloodshed. The battlefields for a currency war can be found at the numerous currency trading desks at banks and investment firms, central banks around the world and currency exchanges.
In the current relatively tepid global economic environment, political and business leaders in many countries are looking for solutions to drive economic growth. One alternative to spur increased domestic business activity is to increase exports. Increasing exports frequently increases domestic production and domestic employment. To grow these exports, countries can seek to devalue their currency as compared to the currency values of their trading partners. This results in the exporting country’s goods being cheaper for other countries to import.
Currency devaluation can be achieved through a range of mechanisms. In today’s global environment, central bank or treasury money printing seems to be one of the more common methods. The general concept is an increased supply of a certain currency, which is not being offset by economic demand for that currency, will result in that currency’s value falling relative to other currencies.
With all the money printing going on around the world, some view the current currency devaluations as a race to the bottom.
Currency devaluation is occurring in many countries. For example, the U.S. Federal Reserve is keeping short-term interest rates artificially low in the quest for domestic economic stimulus. In Europe, the European Central Bank has made various verbal pledges to provide whatever liquidity is needed in its markets, and the Bank of Japan has jumped on the currency printing bandwagon in an effort to kick-start its economic engine.
Some of the generals in these emerging currency wars include Mario Draghi, president of the European Central Bank, and Chairman Ben Bernanke of the U.S. Federal Reserve. Given the significant implications of these currency actions, a number of global politicians are expressing their views and concerns about the devaluation actions of other countries.
Potential carnage from these currency wars includes a significant spike in global inflation. Driven by the abundant supply of many of the world’s major currencies, widespread price inflation is a possible unwanted outcome. Central banks and others controlling the availability of currencies will need to be vigilant in looking for signs of unwanted inflation and in taking timely and corrective actions.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.