El-Erian on Developed Nations: Happy (Indeed Eager) to See Their Currencies Depreciate

Mohamed El-Erian, CEO and Co-CIO at Pimco — the world’s largest bond fund — recently contributed a guest post to the FT spelling out his concerns regarding the “global configuration of currencies,” or more plainly, what’s quickly becoming a race to the currency-weakening bottom among industrialized nations.

He begins by noting Japan’s $21 billion currency sale last week — to bring the yen down from a 15-year high versus the dollar — and then goes on to discuss the intervention’s relevance to the usual coinage-depreciating suspects.

From the FT:

“Meanwhile, in a sharply-worded testimony to Congress, Treasury Secretary Geithner provided lots of data to those that feel that the US should have already labeled China a currency manipulator. And while China has recently accelerated the rate of its managed appreciation — 1% in the last week compared to just 1.6% since the country declared great “flexibility” back in June — this is proving insufficient to counter growing currency tensions.

“These latest foreign exchange developments bring to the fore an inconvenient reality. While not all industrial countries wish to make it explicit, they are happy (indeed eager) to see their currencies depreciate. They see this as helping them address the extremely difficult challenges associated with a protracted period of low growth, high unemployment, and limited policy effectiveness.

“The list of industrial countries wishing to depreciate their currencies is not matched by a list of emerging economies happy to let their currencies appreciate significantly. As a result, foreign exchange tensions are mounting, and the price of gold has been driven to a new record level.”

Whether it’s under the guise of stimulus or quantitative easing, the industrialized nations — now both in the East and West — are willingly debasing their currencies as a shortcut to boost exports and monetize debt. Developing nations like China are hardly slow to pick up on the ruse, and remain in no rush to pick up the slow-growth hot potato by allowing their currencies to appreciate. Exchange rate tensions are rising, and creating the sort of dilemma that can only end poorly… no country will stand to gain as paper money continues in descent towards its inherent value of zero.

You can read more of El-Erian’s thoughts in his FT guest post on how an interesting week lies ahead.


Rocky Vega,
The Daily Reckoning

The Daily Reckoning