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Currency Wars Expand Their Battlefield

December 22, 2012
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Source: IBT

Sir Mervyn King

When central bankers intervene and manipulate financial markets it distorts investment decisions and creates capital misallocations. The full effects of monetary easing will likely not be known for years, but some investors are taking caution ahead of time.

The price of gold has been in decline over the past few weeks. Despite the Federal Reserve launching a fourth round of quantitative easing, the precious metal can not seem to stem the heavy selling pressure. However, long-term investors are not likely to be deterred by the short-term price action as central banks around the world continue to engage in currency wars.

In a recent speech at the Economic Club of New York, Bank of England Governor Mervyn King predicted a continuation of currency wars next year. He explains, “I do think 2013 could be a challenging year in which we will, in fact, see a number of countries trying to push down their exchange rates. That does lead to concerns. Will other countries react in kind? What will happen? The policies pursued by countries for domestic purposes are leading to tension collectively.” He also adds, “There are limits to how far monetary policy can be effective in the very long run shifting spending for the future to today.”

At this point in the war, central banks are still trying to find their limits. Over the past six years, the maestros of the printing presses have injected the financial system with roughly $11 trillion and show no signs of slowing down. At its two-day policy board meeting, the Bank of Japan decided to increase its asset purchase program for the third time in only four months.

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