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Conflicted Objectives
Advisors Capital Management
By Charles Lieberman
January 28, 2013


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Policymakers in the U.S., Europe, Japan, and elsewhere all seek to weaken their currencies to stimulate exports and domestic growth. It is not possible for all of them to succeed, since some currencies must rise in value, if others decline. Although their individual objectives may be in conflict, their efforts are actually mutually supportive. As each country runs an accommodative monetary policy to weaken its currency, they are also simultaneously promoting stronger domestic growth directly. Indirectly, they are also stimulating demand for their trading partners.

It is simply not possible for all the major currencies to decline simultaneously, even though this now seems to be the objective of all the major economies. This is not official policy, at least not publicly. Nonetheless, governments do seem to favor a decline in their currency values. This policy is often criticized, mostly because it suggests that countries are acting selfishly on behalf of their own narrow interests. While valid, this criticism misses the point. The effort to drive down currency values also requires a highly expansionary monetary policy, which keeps interest rates down and should stimulate domestic growth in due course. Cumulatively, the very effort to weaken currency values also stokes domestic demand, which works to everyone’s benefit. As domestic demand increases, so does demand for imports, which helps the trading partners of these economies experience increased demand for their exports.

Consider an alternative restatement of the same conditions. Imagine these countries agreed to a collaborative effort to stoke domestic demand by simultaneously running aggressively expansionary monetary policies. Everyone would agree that such policies would be highly desirable. In fact, the result would be the same as when they seek to drive down their currency values selfishly. In both cases, monetary policy would be highly expansionary and relative currencies might change little, as everyone drives down domestic interest rates at the same time. The motives may not be pure in one case, but the economic outcomes would be indistinguishable.

In fact, central bankers do understand that these individual efforts to run expansionary policy are mutually helpful, even if the politicians don’t. Stronger growth in Japan, for example, would be broadly helpful as an incremental source of demand for exports by Europe, the U.S. and China. The most important consequence of such policy is that global recovery prospects are greatly enhanced when more countries are focused on running expansion oriented policies. So, a global recovery has become far more likely to everyone’s benefit.

 

 

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