An Accidental Currency War?

Feb 10, 2015 Mohamed A. El-Erian

Six and a half years after the global financial crisis, central banks in emerging and developed economies alike are continuing to pursue unprecedentedly activist – and unpredictable – monetary policy. How much road remains in this extraordinary journey?

LAGUNA BEACH – Six and a half years after the global financial crisis, central banks in emerging and developed economies alike are continuing to pursue unprecedentedly activist – and unpredictable – monetary policy. How much road remains in this extraordinary journey?

In the last month alone, Australia, India, Mexico, and others have cut interest rates. China has reduced reserve requirements on banks. Denmark has taken its official deposit rate into negative territory.

Even the most stability-obsessed countries have made unexpected moves. Beyond cutting interest rates, Switzerland suddenly abandoned its policy of partly pegging the franc's value to that of the euro. A few days later, Singapore unexpectedly altered its exchange-rate regime, too.

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Mohamed A. El-Erian

Writing for PS since 2010
132 Commentaries

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President of Queens’ College, University of Cambridge, senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

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Hugo Penteado Feb 20, 2015

Growthmania in a finite planet is just a stupid idea to enrich the rich and to create the biggest social and environmental planetary risks in human history. Growthmania is behind the worst decisions that are being made by blind people around the world. While Central Banks, governments, pundits and greed economists are just thinking about growth after growth in all economies, scientists are calling for absolute reduction of our use of matter and energy to avoid life extinction and collapse. But this is too much for a greed man like M.E.Erian to understand. The same applies for all economists like Paul Krugman and Joseph Stiglitz that still believe Nature is a subsystem of the economic system and therefore our global economy can be bigger than the planet. These poor men still believe Nature and ecological services are irrelevant for the economic process and can be replaced by capital produced by men. And so on. The list of conceptual mistakes is enormous. But as Kenneth Boulding once said "Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist."
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Per Kurowski Feb 17, 2015

The road for the monetary stimulus to reach the real economy is blocked by faulty bank regulations.

http://subprimeregulations.blogspot.com/2015/02/western-world-it-behooves-you-to.html
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kiers sohn Feb 16, 2015

Properly, 1 Euro SHOULD = 1 Dollar. The inflated Euro was a geopolitical arrangement which has seen its last days. $1.30 to the Euro was a Laugh! Proving that currency markets are truly fake! Remember the plaza accords w Japan?
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Joe Bongiovanni Feb 15, 2015

No central banks in the world have monetary 'transmission' powers and this is a big part of the world's "money and debt" problem today.
It is left to the banks to create the money needed to guide GDP-acquisition... by issuing more debts.

Banks have a built-in reluctance to lend (and increase money) when deflation and recession are in the air.
As such, it is Wolf, Turner and Kumhof who have each described a new monetary power structure that removes the banks from the money-creation business and restores that power to where it belongs..... the national governments..... and especially NOT the monetary 'arrangements' of the EU.
The Fed is charged with managing monetary and credit aggregates to achieve GDP potential, but has no power to manage those money constructs.
So, yeah, SOMETHING about the central banking construct must change.
I suggest y'all Google Fisher's 1939 Program for Monetary Reform for the Nobelist's ideas.
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Ergis Sefa Feb 14, 2015

One of the eurozone problems is that 17 different economies, guided by 17 fiscal policy frameworks, have a supranational monetary policy authority. The ECB seems to be disconnected with the real economy situation in many EU member at the periphery. Is it time to have a unified fiscal policy making authority? Would culturally different societies accept to surrender this authority? I belive the latest Greek eletions are a hint to answering this question.

So, what should Europe do?
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Andrew Purdy Feb 14, 2015

One thing that is different today is negative interest rates. Rates are still dropping, and it is possible that the whole world will go into negative rates at some point. Negative rates are an experiment that could never be done in past eras, because currency is almost all-electronic today. A fully electronic currency eliminates the zero bound completely. This experiment is likely to have consequences that are unknown at present, and it may not end well at all.
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ken mwaria Feb 12, 2015

we cannot continue throwing money at speculators and hoping everything else will sort itself QE must be placed together with long term R&D and infrastructure plans while reducing the speculative wings of banks as long as speculation is higher than balance sheets the risk will always be far from optimal.The problem is that speculation is lucrative and those who do so inflluence the people in power
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Michael Muoio Feb 12, 2015

This diabolical masking of depression and deflation will not end well, if rates ever move up. I am coming to the so called possibility of negative real interest rates.....forever. And as this more likely scenario continues to be exported everywhere, it clearly was not a risk consideration of economically self-righteous globalization. No one has a clue as to what the outcome will be....which means, look out below.
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Michael Public Feb 11, 2015

Did all this nonsense not start with China who pegged their currency at a rate which makes exports the most competitive in the World? Surely the solution is for countries to ban any sort of intervention. Let the markets sort themselves out.
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Praveen Swaminathan Feb 11, 2015

QE and its variants are like providing a sick patient with fruits, vegetables,bread,butter,jams,pickles,rice,wheat,corn,milk,honey,ice-creams,etc., and hoping that since he is being provided with all such healthy and nutritious food, the patient will be able to recover.
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Robert Castro Feb 10, 2015

What a wonderful world it would be, if everyone just followed Abacus Road®.
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Paul Daley Feb 10, 2015

El Erian knows what's going on, but it would be nice if he were a bit more forthright about what must be done.

As he notes, monetary policy has developed a transmission problem. Capital markets have grown so large and capital gains so certain following episodes of QE that little of the impetus reaches the real economy except through slow-acting wealth effects and eminently reversible exchange rate effects. Capital markets expand, asset prices inflate, inequality increases, real interest rates run to zero and capital markets lose their capacity to separate good investments from bad. But the real economy continue to languish.

It's not a happy picture. The powers of central banks have been increasingly muffled -- some would say smothered -- by growing capital markets. It's nobody's fault. Nobody planned this. But it's become a problem. If we are to return to healthy and sustained growth in any of the developed economies, then we will need to fill out the tools available to central banks so that they can impact the real economy without at the same time undermining capital markets. That's the problem in front of us.
- Robert O'Regan Feb 10, 2015
  
  The capital markets are growing with the aid of the banks. The banks are not passing the money on to risk loans when the returns to asset appreciation from share purchase etc. are more certain. Recent share buybacks by the computer companies are contributing as well. Holder recently pointed out that the banks were too powerful to be indicted by the Justice Department in the USA. Didn't Rockefeller once indicate that control by the banks obviates the need for politicians?
  A new reply to this comment has been posted.
- Robert O'Regan Feb 10, 2015
  
  The capital markets are growing with the aid of the banks. The banks are not passing the money on to risk loans when the returns to asset appreciation from share purchase etc. are more certain. Recent share buybacks by the computer companies are contributing as well. Holder recently pointed out that the banks were too powerful to be indicted by the Justice Department in the USA. Didn't Rockefeller once indicate that control by the banks obviates the need for politicians?
  A new reply to this comment has been posted.
- Robert O'Regan Feb 10, 2015
  
  The capital markets are growing with the aid of the banks. The banks are not passing the money on to risk loans when the returns to asset appreciation from share purchase etc. are more certain. Recent share buybacks by the computer companies are contributing as well. Holder recently pointed out that the banks were too powerful to be indicted by the Justice Department in the USA. Didn't Rockefeller once indicate that control by the banks obviates the need for politicians?
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
Shailesh Mulki Feb 10, 2015

Very interesting analysis of "Beggar thy neighbor" we are seeing currently. The world needs a Marshall Plan or something similar whereby fiscal spending will supplement aggregate demand that is faltering across the world. Low or negative interest rates warrant long term borrowings to boost spending but with high debt levels there does not seem to political will to push this through. Deflation has become a common theme across the world and due to global integration policy action might need to be co-ordinated at a global level. On another note Mexico did not cut rates but inflation dipped lower closer towards the mid of the targeted band.

Best Regards,
Shailesh N. Mulki
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