Currency devaluation becomes the solution to all economic problems

By: Vincent Tie

Days before Shinzo Abe became Japan’s prime minister in December 2012, he remarked “Central banks around the world are printing money, supporting their economies and increasing exports. America is the prime example. If it goes on like this, the yen will inevitably strengthen. It’s vital to resist this.”

Shinzo Abe’s remarks summarized a prevalent theme in central banks’ attempts to jumpstart their domestic economies today - money printing. I prefer to call it currency printing since it is fiat currencies that are being created out of thin air.

How currencies can be devalued intentionally

So how does currency printing support economies and increase exports? Central banks at the behest of their governments are able to devalue their currencies by inflating their money supply. This is predominantly done by central banks buying government bonds and other financial assets in the open market. Digital currency is credited into the respective banks as payment for the purchases. These transactions inject currency into the banking system which then flow out to the rest of the economy through banking activities.

With more currency circulating in the economy, price inflation in goods and services will inevitably rise since more units of currency compete for the relatively same pool of goods. In other words, each unit of the currency now buys less. This devaluation of the currency makes the exports of the country cheaper compared to other countries.

In Jan 2013, Abe announced a massive 10 trillion yen stimulus for the economy. The government would fund the majority of this stimulus through the issuance of bonds. Now we know that these bonds will eventually be bought up by the Japan central bank in their bid to devalue the yen.

In May 2013, the yen hit 100 yen to a dollar – an exchange rate last seen 4 years ago. The Japanese currency had declined 20% in 6 months. For the Japanese consumer buying goods in the US dollar, they would now require 100 yen to exchange for 1 USD instead of about 80 yen in Dec 2012. The Japanese consumer did not vote for the reduction of their purchasing power. It was not their choice. It was an intentional act by their government hell-bent to devalue the currency believing that it was the answer to spur the economy quickly.

For the Japanese politicians, this route was the easiest to take to achieve quick results which can be trumpeted in the media when economic indicators show growth.

Negative effects on other countries

Japan’s monetary easing actions have also caused problems for other countries. The South Korean won appreciated 21% since Abe took office. Their exports declined as a result. Thailand also cut interest rates to curb the baht’s appreciation as a result of Japan’s monetary policy. They too want to their exports to do well on the international markets. Instead of competing based on innovation to bring better products and services to the market, currency devaluation is now a means to get ahead of your competitors.

Today, competitive devaluation of currencies to spur economies is a beggar-thy-neighbour policy that is commonly adopted by governments and their central banks. It is not sustainable and it also requires governments to go deeper into debt. Japan is not the sole culprit. Every country that has a central bank today is involved in competitive currency devaluation. They may call it by different nice-sounding names such as ‘quantitative easing’, ‘loose monetary policy’ or ‘monetary stimulus’ but they all point to the same thing – inflating and devaluing the currency.

Be your own central bank

Given that the currencies we use daily are subject to unwarranted devaluations by flawed policies undertaken by those in power, it begs for us to re-think how we should store our hard-earned wealth. It is no wonder that famed investor Marc Faber believes that we live in a time where investors "should be their own central banks and gradually accumulate gold reserves as a currency".

Central banks today are the biggest institutions that buy gold – and they have been buying record amounts of the yellow metal. Collectively, they bought 534.6 tonnes of gold in 2012 – the highest level of purchases since 1964. Their continuing buying of gold in large amounts sends a clear message – gold is a liquid hard asset to hold in times of economic uncertainty. It is also money.