I see lots of people discussing how “successful” Japan’s strategic decimation of the Yen has been so far. They mainly just cite the Nikkei’s enormous rally as “proof” that all’s well that begins well. Of course, that’s not always the case when you’re using a nominal wealth metric to describe how the real economy is responding. Remember, the stock market is not the economy. It is essentially the guesses of a group of semi-intelligent half apes who all think they’re smarter than one another.
Anyhow, the more important point to understand is that a currency war will likely end up with no winners. This isn’t a poker table where one central bank happens to be much better at the game than all other central banks. This is a poker table with a whole punch of very powerful silver backs who are all on relatively equal footing in aggregate.
Let’s just take a look at how this could all unfold for instance. So, Japan has been talking down the Yen and everyone sees how well that’s working. Then the ECB decides they also want to stimulate their economy by driving the Euro down. So the dollar goes up relative to the Yen AND the Euro. And the Fed looks around and sees the economy weakening and says “wait just a minute here fellas”. And then the Chinese start seeing the RMB rise relative to the Euro and say something like “we would like to ‘help’ the European people out with their debt crisis so we will stabilize their currency”.
You can see the merry-go-round at work here. Everyone can’t devalue. So, this works great for Japan so long as everyone else lets them just sit around and have their way with the currency. But a currency war won’t end well for anyone. But if you have to sit at the table with the other apes you might have no choice but to engage them in their fruitless battle….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.