WITH hope growing that the global economic recovery is set to get back on track in the second half of the year, discussions have moved from austerity to boosting competitiveness.
There are uncomfortable and term-limiting ways of making the structural changes needed to boost competitiveness, which understandably politicians are reluctant to follow. The easiest answer to boosting exports and competitiveness is a weaker currency. And as we move from a world gripped by fear of a collapse of Europe’s common monetary union, so will talk of "currency wars" grow louder.
Everyone is either concerned or a participant in weakening their currency in order to make their exports cheaper.
Highlighting the threat of this currency war was the Japanese government’s stated desire for a weaker yen to boost struggling exports.
Policies followed by its central bank have become much more aggressive in following the mandate, raising questions about its independence.
European Central Bank chief Mario Draghi last week said the lender was "monitoring" the appreciation of the euro as investors get more bullish on the Continent’s prospects.
It followed French President Francois Hollande’s statement in which he too decried the euro’s appreciation for holding back growth in Europe’s second-biggest economy.
There’s been much criticism of the monetary policies followed by larger economies such as the US. By keeping rates at record lows and embarking on quantitative easing, as the US Federal Reserve has done, some emerging market currencies have strengthened, making them less competitive.
Due to labour issues in our mining and agricultural sectors, the rand has not been one of them. But for other currencies such as the Brazilian real, appreciation against the dollar has affected exports.
Brazil’s finance minister warned the currency war could get even worse if Europe joined the fray. Instead of weakening the euro to save jobs, he said countries like France should focus on reviving their economies with more investment. The eurozone’s unemployment levels are at record high levels as the region struggles to recover from its sovereign debt crisis.
At the root of the currency wars has to be the Federal Reserve, whose actions amount to lowering the greenback’s value. Rates are at Second World War lows and the bank still shells out $85bn a month to acquire securities basically to keep Americans in their homes and reduce the jobless rate.
The action has kept the dollar on the back foot over the past couple of years, only to be strengthened in times of stress as investors pile into the currency because of its safe-haven status.
As an economy based on domestic consumption, some have asked how the US can gain from a weaker dollar. If the US president is to keep promises of bringing jobs back to America and winning the unemployment battle, he is going to need a competitive advantage. If you printed the world’s reserve currency, what would you do?
ONLY when markets are shaped by what’s actually out there rather than what we think is out there — or in other words, sentiment — will the real value of assets be known. We’ll only be closer to that point when US monetary policy has to deal with something as real as inflation.
Without it, we remain in a world flooded with liquidity looking for higher yields. When we are convinced everything is going to be okay, risk assets will rally, and the opposite is true when the consensus view is that we are on the cusp of economic disaster.
Until inflation becomes something worth mentioning on Capitol Hill or in Frankfurt, this is by and large how markets will move.
There have been reports that the US Fed is looking at just how to end its quantitative easing policy without sending a signal to both stock and bond investors of a change in monetary policy, meaning a tightening.
The reason the bank would want to allay fears that it is prematurely moving away from cheap credit — the Fed has pledged low rates for as long as 2015 — is that it would like to avoid a sell-off in stocks and for bondholders to scurry for cover.
With a recovery still fragile, everyone is scared of expensive money. We are far from being over our reliance on cheap money, which is going to make the escape from this see-saw scenario go on for a while still.
And it is still premature to even consider inflation in the US because there is no wage inflation and bank lending is only starting to pick up.