Friday, January 4, 2013

Bugger Thy Neighbor: "Switzerland and Britain are now at currency war "

Evans-Pritchard has been on a bit of a roll the last couple weeks and not nearly as despondent-sounding as we've sometimes encountered.
From the Telegraph:
It seems you can’t debase your coinage these days even if you try.

The Bank of England is straining every sinew to drive down sterling with quantitative easing, and what happens?

The Swiss National Bank trumps Threadneedle Street with an outright blitz of Gilt purchases. They just print it, and buy.

The Swiss and UK central banks are effectively fighting a "low intensity" currency war against each other. It has come to this.

Here is the offending chart from the IMF (Picture editor's note: apologies for poor quality, unable to find better version):

And this is what the Swiss did to Euroland a quarter earlier:

One awaits with curiosity to see what will happen when Japan – fifteen times the size – kicks in with its own nuclear plans to drive down the yen, and Asia follows suit....MORE
However, a couple months ago the Financial Times' Money Supply blog said:
Currency wars: more love-thy-neighbour than beggar-thy-neighbour?
Foreign exchange intervention has long had a bad reputation; it earned the beggar-thy-neighbour tag back in the 1930s. Now, even actions that aren’t explicitly aimed at influencing the exchange rate, such as the Federal Reserve’s quantitative easing, prompt accusations that central banks are provoking a “currency war”.
A fascinating piece of research, published by the Bank for International Settlements on Tuesday, claims this bad rep is no longer fair. This from the paper:
[The phrase beggar-thy neighbour] condemns currency depreciation in a world of insufficient effective demand as a case of robbing the foreign Peter to pay the domestic Paul: cheaper exports of the home country increase output and employment at the expense of sales and jobs in competing countries.
However, policy developments mean this analysis has become incomplete and misleading.
The paper argues that because central bank reserve managers now invest largely in bonds rather than in gold – as was the case when the beggar-thy-neighbour tag was coined, foreign exchange interventions end up having largely the same impact as quantitative easing but on a global scale. Interventions end up lowering interest rates internationally, rather than just propping up demand in the country which is buying the foreign exchange....MUCH MORE