A War where Everyone Loses - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 23 February 2013
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Is it possible to have a war where everyone loses? Despite both sides trying their best to win, they both end up much worse off as a result. In hindsight, it would be clear to not start a war in the first place. This is certainly possible. In fact, its very likely anytime there is a conflict. Both sides usually always become worse off.

In the global financial markets, a certain type of war is taking shape. Instead of armies fighting, it is central banks. I'm talking about currency wars. This term gets thrown around a lot in the news, so let's define what exactly it is. A currency war is when two or more countries take actions to devalue their currency.

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The common knowledge goes like this: If we have a weaker currency, it will help our economy because exports will rise. At the same time, imports will fall, which is good too. To achieve a weaker currency, it means keeping interest rates low, possibly fuelling inflation, and doing this more than other countries.

The problem occurs when all countries start to behave this way. When everyone tries to weaken their currency, no one succeeds. Instead, economies are hurt. Inflation is higher because central banks are pursuing loose monetary policy. In fact, if everyone tries to weaken their currency, the only result is higher inflation for everyone. And this makes us all worse off.

In fact, it is not even the case that having a weaker currency is necessarily good for the economy. A weak currency makes imports more expensive, and this increases the cost of raw materials (like crude oil), and reduces consumers' purchasing power.

It we look at countries around the world today, it is nearly always the case that countries with stronger currencies are economically better off. Countries with weak currencies tend to be poorer and suffer from higher inflation. Currency wars are destructive because everyone loses; we should strive to avoid them at all costs.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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5 Responses to "A War where Everyone Loses"

R Balakrishnan

Feb 24, 2013

Indian leadership is week keeping the country and its currency week. They do not have the confidence in themselves and the country they serve!

Like (1)

ganesh adiga

Feb 24, 2013

you are 100% correct. but who cares

Like (1)

Anupam Garg

Feb 24, 2013

India need not do any devaluation...our inflation is sky high anyway

Like (1)

shrikrishna

Feb 24, 2013

Dear Mr. Asad,

Good Morning!!!

Thanks for always providing usual information on current topics.

with regards to above subject, I am unclear about Japan currency, even though Japan is having its currency devaluated from long time but still they are at no 2 position in world ranking? and not getting poorer.

Pls explain.

with best regards
Shri Tamhankar

Like (1)

Anil Dabir

Feb 24, 2013

Excellent analysis

Like (1)
  
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