Quantitative easing seems to be the common mantra in the minds of central bankers at some of the world’s largest economies. There’s an easy allure to the idea of simply making tons of easy cash available for ‘investment’ when the central bank prints up cash and trades it for bonds. Eventually, it is hoped, that enough of this money will go into economic activities that actually produce results that matter like jobs and, most importantly, inflation. The idea is that the more money there is, the more people will have to spend and the higher the rate of inflation. After all, according to classical economics, if the supply of cash increases but the supply of goods remain static, the price of the goods increases. The hope is that the price increase in goods will then spur more economic activity. While the jury is still out as to whether quantitative easing truly works, one thing is for sure: it causes currency devaluations.
Quantitative easing is nothing more than currency warfare
By crashing the value of your currency, you make the value of goods and services you produce more attractive to trade partners. This is the one ‘side effect’ of quantitative easing that many of its proponents don’t publicly crow about. Why should they? That would be tantamount to declaring fiscal policy-based trade war on your neighbors. Regardless, this is precisely what’s at play as the US depressed the dollar, the Bank of Japan crushed the yen, and, now, the ECB depreciated the euro. It remains to be seen whether this will actually boost exports or trigger other factors that would mute any trade effects. It seems quantitative easing keeps colliding against a central fact in economics: an economy is like a balloon, when you make a conscious push on one side, another side unexpectly swells up.
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