Japan’s latest overt effort to cheapen its currency could set off a healthy spiral of competitive devaluations suggests the Economist’s Free Exchange blog. While everyone might not be able to devalue their currencies relative to each other, it would spur a global battle against deflation since most efforts to devalue a currency amount to monetary easing.
Oddly, the history of the gold standard sheds some light on how a global push for inflation can drive nations out of economic downturns:
“The departure from gold benefited every country that tried it. The mechanism here wasn’t competitive devaluation, but the freeing of monetary policy, which had previously had to respond to gold outflows through increased interest rates, which devastated domestic economies.”
“The big risk to interventions in currency markets is that other nations will respond with trade restrictions rather than reflation. So long as sales of one currency are met with sales of another, I’m fairly optimistic about this process.”
This sheds some light on why gold prices may have spiked right after Japan intervened, and are now at record levels. It also shows how if one is long gold, then you don’t want a gold standard, since the lack of one is what provides the flexibility to reflate economies.