Soon everybody will be scared about ‘currency war’ again – we should be celebrating

With the dollar continuing to strengthen and now the Japanese yen starting to take off as well central bankers in the US and Japan are likely increasingly becoming worried about the deflationary tendencies of stronger currencies and recent comments from both countries’ central banks indicate that they will not allow their currencies to strengthen dramatically if it where to become deflationary.

This has in recent days caused some to begin to talk about the “risk” of a new global “currency war” where central banks around the world compete to weaken their currencies. Most commentators seem to think this would be horrible, but I would instead argue – as I have often done in recent years – that a global race to ease monetary policy is exactly what we need in a deflationary world.

If we lived in the high-inflation days of the 1970s we should be very worried, but we live in deflationary times so global monetary easing should be welcome and unlike most commentators I believe a global currency war would be a positive sum game.

Over the last couple of years I have written a number of posts on the topic of currency war. The main conclusions are the following:

  1. Currency war is a GREAT THING and is VERY POSITIVE – if indeed we think of it as a global competition to print money. This is what we need in a deflationary world.
  2. As long as we are seeing commodity prices decline and inflation expectations we can’t really say that the currency war is on yet.
  3. Currency war is NOT a zero sum game. It is a positive sum game in a deflationary world.
  4. Don’t think of monetary easing/currency depreciation to primarily work through a “competitiveness channel”, but rather through a boost to domestic demand. Therefore, we are likely to actually see the trade balance WORSEN for countries, which undertakes aggressive monetary easing. The US in 1933 is a good example. So is Argentina in 2001-2 and Japan recently. Sweden versus Denmark since 2008.

I don’t have much time to write more on the topic this morning, but I am sure I will return to the topic soon again. Until then have a look at my previous posts on the topic (and related topics):

Bernanke knows why ‘currency war’ is good news – US lawmakers don’t

‘The Myth of Currency War’

Don’t tell me the ‘currency war’ is bad for European exports – the one graph version

The New York Times joins the ‘currency war worriers’ – that is a mistake

The exchange rate fallacy: Currency war or a race to save the global economy?

Is monetary easing (devaluation) a hostile act?

Fiscal devaluation – a terrible idea that will never work

Mises was clueless about the effects of devaluation

Exchange rates and monetary policy – it’s not about competitiveness: Some Argentine lessons

The luck of the ‘Scandies’

Leave a comment


  1. james in london

     /  October 10, 2014

    Very true. We have nothing to fear but but fear.

  2. This is why central banks need to offset demand shocks to money with a NGDPLT or similar rule. Exchange rates will manage themselves.

  3. Benjamin Cole

     /  October 13, 2014

    Excellent blogging.

  4. Manipulating a currency has two parts
    1) If you devalue your currency then capital and investments become expensive. Thanks to massive current account surpluses accumulated over year, this is no issue for Japan. It would be an issue for Greece or Italy if they left the euro.
    2) If you devalue then your local labor gets cheap.

    Thanks to FX traders/markets (and market monetarism behind), Japan is able to devalue far above the correct FX rate, that according to IMF is around 90 per dollar.
    Everything above is a distortion of FX rates and creating a mercantalist advantage for Japan that can only be answered by labor costs de- and disinflation abroad.

    Moreover, the global FX devaluation against dollar and the asset price inflation in the US is able to create another 2008 moment. Fortunately Americans are not so stupid again: In 2013 household savings rate fell from 7% to 5% but now it is ticking up (Q3 personal spending release) Currently, however, higher savings in dollar enforces again the new US asset price bubble.


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