Currency Wars is the term coined by Brazilian finance minister Guido Mantega to describe what he saw as the dangerous ramifications of ultra-loose US monetary policy. Mantega (and others) believe that the US is debasing its currency, causing money to rush into emerging market currencies, threatening their ability to compete, and stoking inflation.In a speech delivered today at the IMF meeting in Japan, Bernanke took on this idea head on.
The speech is short and sweet and makes a few key points, which we’ll just bullet.
- First of all, private money inflows into emerging markets are related to a lot of things, not just interest rate differentials.
- Growth differentials also play a significant role, as research has shown.
- What’s more, these flows have diminished in recent years, despite ever-easier monetary policy.
- Emerging markets have tools to deal with private money inflows. They’re not helpless.
- An economy that did not intervene would also benefit by the strengthening of domestic demand. Stronger currency = greater ability to buy imports.
- Finally, there are real benefits to emerging markets from developed market easy policy. Most notably, the world benefits from US easing if that US easing stimulates activity and stokes import demand.
Bottom line: Things are a lot trickier than saying: US easy money screws emerging markets.
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