EDITOR'S LETTERJohn Stepek
With interest rates so low, we’re in for a nasty surprise
Since 2009, the world’s major economies have quietly tried to get one over on one another by using central bank policies to undermine the value of their currencies. A 25% slump in sterling in 2009 helped the UK through the worst of the recession. Japan’s post-2012 revival has been helped greatly by the slide in the yen under ‘Abenomics’.
In 2014, when he was still barred from doing quantitative easing (QE), European Central Bank governor Mario Draghi assisted troubled eurozone nations by talking down the euro. And even the Federal Reserve largely managed to keep a lid on the dollar until the middle of last year. So it shouldn’t be that much of a surprise that China has finally joined the ‘currency wars’, allowing the yuan renminbi to weaken drastically this week.
There’s plenty of debate over whether China is making its currency more flexible so as to secure the yuan a bigger role on the global stage, or if it’s simply a ploy to boost flagging growth. But this is largely irrelevant. The reality is that China’s economy is slowing, partly because it can’t compete with the likes of Germany and Japan at current exchange rates. Investors realise that. So in the absence of support from China’s central bank, this may well be just the start of a longer decline for the yuan.
The problem is that currency wars are a zero-sum game. As two of MoneyWeek’s favourite analysts, Russell Napier and Société Générale’s Albert Edwards have noted, a weak Chinese currency will export deflation to the developed world (by making imports cheaper), even as central banks struggle to push inflation to anywhere near their target levels.
• Read the full editor’s letter here: With interest rates so low, we’re in for a nasty surprise