Thursday, October 23, 2014

Bloomberg: Currency Wars Still Around - Now in an Effort to Fight Deflation

Just more evidence that global financial authorities are very concerned about the threat of deflation and disinflation. This Bloomberg article says that Currency Wars are still around but now they are used to try and export deflation to someone else. A few quotes from the article below. Readers should read the full article linked above to get full context.


"Currency wars are back, though this time the goal is to steal inflation, not growth.
Brazil Finance Minister Guido Mantega popularized the term“currency war” in 2010 (and Jim Rickards wrote his book called Currency Wars) to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. Now, many see lower exchange rates as a way to avoid crippling deflation."

"Weak price growth is stifling economies from the euro region to Isreal and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show."

“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currencystrategy at London-based HSBC Holdings Plc, which does business in 74 countries and territories, said in an Oct. 17 interview.“This is about deflation, exporting your deflationary problems to someone else.”

"At 0.3 percent in September, annual inflation in the 18-nation bloc remains a fraction of the ECB’s target of just under 2 percent. Gross-domestic-product growth flat-lined in the second quarter, while Germany, Europe’s biggest economy, reduced its 2014 expansion forecast this month to 1.2 percent from 1.8 percent."

"Disinflationary pressures in the euro area are starting to spread to its neighbors and biggest trading partners. The currencies of Switzerland, Hungary, Denmark, the Czech Republic and Sweden are forecast to fall from 4 percent to more than 6 percent by the end of next year, estimates compiled by Bloomberg show, partly due to policy makers’ actions to stoke prices."

Deflation is spilling over to central and eastern Europe,” Simon Quijano-Evans, the London-based head of emerging-markets research at Commerzbank AG, said yesterday by phone. “Weaker exchange rates will help” them tackle the issue, he said."

"Hungary and Switzerland entered deflation in the past two months, while Swedish central-bank Deputy Governor Per Jansson last week blamed his country’s falling prices partly on rate cuts the ECB used to boost its own inflation. A policy response may be necessary, he warned."

Deflation is such a major part of the story that dealing with that, by whatever means necessary, is key,” Simor Derrick, the London-based chief currency strategist at Bank of New York Mellon Corp., said Oct. 17 by phone. “If that involves getting the currency lower, then so be it. You have to deal with it.”

My added comments: By now it should be pretty clear that deflation is the worry of the day. And yet we are also getting warnings from the IMF and BIS that some financial assets are over valued and over inflated. All this tells us that officials are very concerned that a deflationary spiral could happen that could move faster than they can react.

So we watch and wait to see if that does happen or if the financial authorities do react by ramping back up more stimulus and QE. Right now the US Fed is sending mixed signals and US financial media is still pushing the view that the US is OK and does not need to worry about the deflation spreading around the globe.

But we know this is the most connected global financial system ever. Does it really make sense that the world could go into a deflation event while the US remains above it all?

We will continue to follow it all here to see how it unfolds.

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