Home > Causes of Inflation, Europe, UK > The Currency War Is Not New: It’s Merely Escalating

The Currency War Is Not New: It’s Merely Escalating

A quick summary of where we are in the “global currency war:”

For several years now, global central banks have been engaging quietly in this war. Each central bank has been implicitly playing “beggar-thy-neighbor” by making its currency relatively plentiful, and therefore relatively cheaper, than its neighbors. In one case, that of Switzerland, the currency issue became explicit rather than implicit, though not to weaken its currency but rather to stop it from strengthening without bound (see Chart, source Bloomberg). It is instructive that, in order to accomplish this end, the SNB had to pledge to print unlimited quantities of Swiss Francs to sell – essentially saying that if it can’t beat ‘em, it would have to join ‘em.


Now, in January some well-known asset managers muttered the ‘currency war’ phrase, and Japan’s Economic Minister Akira Amari suggested that the Yen could fall 10% (and Japanese officials have implied that they are looking for such a move to help end deflation). Since then, both the G20 and the G7 have discussed whether countries ought to be engaging in currency adjustment as a means of confronting macroeconomic challenges. Searches for the term “currency war” on Google (see chart, source Google) have risen appreciably. But again, this isn’t really new; what’s new is that people are actually talking about it.


Earlier this month Adair Turner, chairman of the Financial Services Authority talked about “permanent monetary easing” and said that central bankers “may need to be a little bit more relaxed about the creation” of money. By permanent, he means that the central bank would print money with the express intention that the printing would never be reversed. Ignoring history, Lord Turner said “the potential benefits of paper money creation [to stimulate the economy] should not be ignored.” Today, the Bank of England released its quarterly forecasts, showing policymaker expectations that inflation will stay higher than the Bank’s target for longer than expected, and growth will be weaker than expected. Even less surprising, given talk about “permanent” easing, is that 10-year UK inflation swaps are now back above 3.40% (see chart, source Bloomberg). The first 30bps of this jump was due to the decision by the ONS to maintain the current definition of RPI for existing contracts (I mentioned this here), but some amount of it is probably due to the currency wars talk.


It bears noting too that the 10-year US inflation swap is within a handful of basis points of its post-Lehman highs.

The UK inflation market has been around longer than other inflation markets. Index-linked Gilts date back to the early 1980s. So I wonder whether we shouldn’t be a bit more curious about how much of the rise in UK inflation expectations actually reflect a rise in global inflation expectations due to the currency wars that are (and have been) underway.

Because to some extent, the question of “who will win” the currency war is difficult to discern, and to some extent the question is moot. Like in the movie “WarGames,” the only thing that has been certain since the currency war started a couple of years ago is that there will be a lot of scorched earth. The only real “winners” are debtors, relative to lenders.


Who will win? To change the analogy: if you’re in a bay surrounded by people in boats who are pumping water in so that they can see who can sink his boat the fastest, the winner is the one who is wearing a life vest. All the others are just some varying grade of loser. Don’t be the last one to grab a life vest.

Categories: Causes of Inflation, Europe, UK
  1. Andy
    February 13, 2013 at 9:05 pm

    What I don’t understand is why given all the traditional inflation signals that seem to be flashing, why measured inflation does not seem to be rising too aggressively anywhere in the world. Just anecdotally, I see many more prices rising for things I purchase regularly, than falling, and the rates of change are far higher than 2.5% per annum.
    Is it possible that at some point the numbers literally explode higher? rising 2% in the course of a few months or something like that?

    • February 13, 2013 at 9:48 pm

      On core, probably not that fast just because so much is housing. But core goods inflation is very weak while services is pretty strong, and core goods tends to move faster…look, our forecast is core of 2.6%-3.0% at year-end, with more risk on the upside. Could you get an 0.3%, 0.3%, 0.3%, 0.4% and raise core inflation 1% in a third of a year? Sure, but the thing to watch is housing. I agree the volatility of prices seems to be rising, and I wouldn’t say we can’t get something sudden like you suggest – all we need is velocity to turn back higher, and it could/will happen rapidly.

  2. PeterMcT
    February 13, 2013 at 9:37 pm

    complicated….. it’s an fx skirmish, not a war…. and inflation, tough… measured inflation is trending down, gold hasn’t moved, USD basically the same.. inflation expectations up a twitch but not enough, and even this temporary factor is in play http://www.nytimes.com/2013/02/12/us/politics/sharp-slowdown-in-us-health-care-costs.html

    • February 13, 2013 at 9:49 pm

      yeah, but core inflation is about to turn higher thanks to housing. Gold was probably overbought and isn’t that good an inflation hedge anyway. The medical care story is interesting, but I’m not sure I would project too far ahead. Insurance costs have certainly been rising rapidly, so the insurance companies are seeing rising costs…

      • Jack Soucy
        February 15, 2013 at 3:43 am

        It bears remembering, that inflation has varied influence across markets – a general tendency is not a real phenomenon for any particular market. UAE rents have rebounded 20% (give or take) over a matter of months. Not due to economic recovery (business here continues a long slide into the gutter), but instead, pure inflation.

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