Why The Modern Currency Wars Are Unproductive

• HSBC believes that the inflationary environment created by currency devaluation in the 1930s is an unrealistic goal for modern economies.
• In recent years, the devaluation of 60 percent of global currencies has come at the expense of the stronger 40 percent of currencies.
• The modern world cannot collectively devalue.

In a new report, HSBC Global Research analyst Stephen King discusses why the global currency wars in recent years have been completely unproductive. According to King, expecting the same positive outcome from currency devaluation that occurred in the 1930s in the modern global economy is absurd.

The 1930s

In the 1930s, global economies removed currencies from the gold standard and freed countries to generate impactful monetary stimulus for the first time. This monetary revolution quickly turned the deflationary environment into an inflationary environment.

"This led to lower real interest rates, reduced real debt levels, alleviated bankruptcy risk and helped boost economic activity," King explained.

See Also: Stuck In A Currency War?

Modern Currency Wars

King noted that the currency wars in recent years have seen 60 percent of global currencies devalued or depreciated against the remaining 40 percent. The result is lackluster inflation in the countries with the strongest currencies, specifically the US and China.

“Worse, to the extent that currency wars have contributed to financial uncertainty, the world trade multipliers typically associated with economic recovery have failed to materialize,” King added.

What's The Solution?

King suggests that central banks should stop focusing on meeting inflation targets via currency devaluation and start focusing more on boosting productivity. "However, we’re more likely to see further monetary experiments and a continuous process of "robbing Peter to pay Paul,'" he wrote.

Ultimately, the modern world cannot collectively devalue, and modern currency wars are doing more harm than good to the global economy.