Exchange Rate War is the Greatest Danger
Federal Reserve to implement the second round of quantitative easing (QE2) motivated by a desire by low nominal interest rates and push up inflation expectations makes the real interest rates; the European Central Bank that Europe faces the risk of deflation and inflation are not large, so the different policy positions with the United States,quantitative easing, the Bank of Japan is to promote the flow of credit on the one hand, the other is to avoid a sharp appreciation of the yen.
Side effects of Fed policy is the dollar, which gives the developed and emerging market countries have challenges, some countries have taken a mild defensive measures. G20 meeting hope to reach an agreement to avoid the exchange rate of the outbreak of war, or will the global economy have brought great destruction. ”
Recently, the Federal Reserve restart the quantitative easing policy, the Bank of Japan also began to buy assets, the European Central Bank and Bank of England is temporarily on hold, China, India and Australia and other countries are forced to inflationary pressures the central bank to raise interest rates.
China’s current situation facing Germany in the sixties and seventies of the 20th century, the experience is very similar to the experience from Germany, I expect China will be more intense on the exchange rate debate, but the appreciation of the renminbi will eventually be to protect the domestic public suffering from inflation. ”
Central banks take different positions
QE2 is the main reason for the Fed to implement domestic output gap, capacity utilization and lack of relatively slow economic growth, deflationary pressures. Policy makers fear that deflationary pressure will turn into deflation similar to Japan experienced, so they want to take early action to address this problem. Europe and the United States is somewhat different, though related to the U.S. about the first half, but growth in Europe is slightly stronger than the U.S. Some, especially in the United Kingdom. In addition to economic performance, a greater difference between the U.S. and Europe the risk of deflation. European Central Bank that deflation to Europe is not a very serious risk, and inflation risk is still very far away.
Japan’s central bank to buy assets in a goal is to promote the flow of credit, the other is to avoid a sharp appreciation of the yen, because in the United States, three in Europe and Japan, Japan is the weakest on the one hand, the yen rose against the Japanese due to Impact is also the largest. As for the measures taken by the Bank of Japan also, if the current policy to no effect, the Bank of Japan may have to further relax monetary policy, or will again intervene.
War broke out the exchange rate has not
Fed QE2 is a side effect caused by the falling dollar, euro and British pound has also risen. While the euro rose to date but also not particularly large, but if this rally continues, will certainly make the European economic slowdown, the ECB also made into a dilemma. Excessive if the euro’s rise could eventually force the ECB follow the Fed has implemented quantitative easing policy.
The worst scenario is that some people call may cause the exchange rate war. I think that there is no outbreak of such a war, but if the situation deteriorated, it may lead to trade wars and protectionism is rampant, this is the greatest danger. In the past three decades, we all saw how the globalization of trade has brought us great benefits, particularly to China, so if protectionist forces rise, the global economy is bound to cause huge losses.
Emerging market countries in trying to take some of the more modest defensive measures, some countries have some restrictions on capital inflows to take measures, such as Brazil and Thailand, but these are only some of the obstacles set by capital inflows rather than build the wall, so I do not may be one hundred percent “waterproof.”
China’s present situation reminds me of Germany in the 1960s and early 1970s experience, when the United States is also implemented loose monetary policy, global markets were flooded with U.S. dollars, in Germany at that time was a big discussion about DM because we are worried that if Mark to appreciate, will hit exports affect economic growth. Not to mark the appreciation of domestic inflationary pressures facing the great period of time, we found that does not work, so finally we had to mark the appreciation to get the inflationary pressure from the United States against the barrier. Today was the case in China and Germany have many similarities, so the experience from Germany, I expect China will be more intense on the exchange rate debate, the yuan will eventually appreciate, in order to protect the public from the domestic inflation suffering.
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