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Stimulating the Economy with Competitive Currency Policies

American dollarsWhile competitive currency devaluation policies initially emerged almost a century ago as a means of taking over export wealth from other nations through price discounting, it continues to evolve and emerge in the modern markets as a means of stimulating economic growth within a nation. Whether it be through mechanisms of stimulus, tax incentives, or the open-market sale of currency reserves, governments today are beginning to shift their monetary policies towards aggressive ‘beggar thy neighbor’ policies that threaten to destabilize the global economy in their pursuit of export incomes and pricing advantages. Looking forward, we can see how it is that the monetary policies initiated today by countries like Brazil, Japan, and Switzerland might very well be enough to define the economic trends of the next decade through the trends they establish.

Brazil began the most recent discussion of competitive devaluation policies as a means of stimulating economic growth as it made clear to the world in 2010 that it would be starting a campaign to improve its level of appeal to importing customers through cheaper product. These comments sparked a great deal of concern around the world, as Brazil essentially made clear a desire to export commodities and manufactured goods at a discount through its currency, and therefore reduce the ability of countries like Korea and Japan to export technological goods, while all of North America’s commodity exports became threatened by reduced real prices through the devaluation of the Brazilian devaluation. Combined in the way in which similar policies taken on by Brazil in the 1990’s acted to create export growth in agricultural products at the expense of US exports, there is a case to believe that the policies today stand to create an meaningful outcome for Brazil at the expense of North American exporters.

More recently than Brazil, Japan has come out to declare that it will be aggressively increasing the rate at which it devalues its currency so as to stay competitive in export markets. Such a policy comes at the expense of nations such as China, and more specifically, South Korea, all of which compete geographically and on a cost basis for exports in consumer goods and electronics. However, what differentiates this policy from those seen previously is the way in which the Japanese economy has been stuck in a state of perpetual inflation and devaluation for an entire generation. As such, the desire to further devalue the currency simply comes to the world as being just more of the same old policy decisions.

That being said, this new announcement comes with contextual implications as a result of the responses coming from global competitors. With so much inflationary pressure already coming from the USA as a result of the QE policies, investors are wondering if this is as much a policy that competes for export business as it is one that attempts to keep the country as an export vendor, as opposed to an import purchaser

As it exists today, beggar-thy-neighbor policies are alive and well in their most traditional sense. However, what remains in question is whether or not they will be able to create the desired consequences of economic stimulation. While such periods in the past have worked well in periods where there is an importer in the midst of a boom-cycle to consume the now-cheaper foreign products, one must wonder about who it is will be buying all of these discounted products in an environment where consumers don’t have any money.

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