Currency Wars 2015

The year 2015 has introduced the phenomena of currency wars, devaluation, negative interest rates and central government stimulus policies aimed at fighting deflation and creating competitive advantages of one country over the the next through fiscal engineering.

Randall W. Forsyth wrote in Barrons that "not since the 1930s have central banks of countries around the globe so actively, and desperately, tried to stimulate their domestic economies. Confronted by a lack of domestic demand, which has been constrained by a massive debt load taken on during the boom times, they instead have sought to grab a bigger slice of the global economic pie". However, if the world economy is not growing at a sufficiently rate, in other words if the global pie is not expanding, this is a zero-sum game without any winners, except, as analysts at Morgan Stanley argue, that the early movers in currency wars are the biggest beneficiaries at the expense of the late movers.

This beggar thy neighbour policies implemented by central banks of Canada, Switzerland, Denmark, the Euro Zone, Australia, Russia, India, Singapore and Sweden may provide short -term advantages, but it is logical that if all countries engage in this behaviour simultaneously, there can ultimately be no winner. The U.S. implemented the first large-scale stimulus programme with its quantitative-easing and near 0% interest rates. Japan followed next and now it is the turn of the EU. The world's largest economy, China, might be the next huge player to devalue its currency, a truly frightening prospect. The United States is threatening to punish other states with import tariffs if it can be proven that an exporting country is deliberately weakening their currency to make its exports cheaper and the prospects for global trade war is increasing by the day.

Ironically, currency devaluation and the return to the Drachma might be Greece's only salvation and a way to rebalance its economy and boost exports and in this case, it might even be the prudent step to take. As for the rest of participants and prospective currency warriors, this can only end badly.