The global currency wars are heating up again as central banks embark on a new round of easing to combat a slowdown in growth. The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high.” With the outlook for the global economy being downgraded by the International Monetary Fund and inflation slowing to levels that may hinder investment, countries and central banks are revisiting policies that tend to boost competitiveness through weaker currencies.
Race To The Bottom
If every country tries to devalue their currency at the same time, it can become the battle of the printing presses. According to Wikipedia:
Races to the bottom can be described in game theory by the prisoner’s dilemma, originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. This is an exercise in which the optimal outcome for the entire group of participants results from cooperation of the participants, but it is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate.
The term currency war is often tossed around in the financial press; what exactly does it mean and how can it harm growth in the long run?