Thursday, August 27, 2009

Quantitative Easing Coming Near You: the Devaluation of Everything

Currencies is one of the favourite subjects here as it influences all prices. Gold and commodities depend on the dollar and its various exchange rates versus other currencies. Printing money and dropping rates makes the dollar go lower, commodities higher, and make people go hungry. In fact, people die because of the dollar, a fact that seems ignored by central bankers.

Soaring currencies also threaten to derail fragile economic recoveries around the globe. That is exactly what Timothy Lane, one of Canada's central bank most senior advisers, meant when he sent a very strong signal that the rhetoric about the currency's rise in the last couple of months is real:

"persistent strength in the loonie risks derailing Canada's fragile rebound from recession by hurting exporters who stand to gain from nascent signs of life in the U.S. economy."

The Globe and Mail reports that "Mr. Lane then upped the ante by signalling that the loonie's current trajectory could force the Bank of Canada to join the U.S. Federal Reserve, the Bank of England and other central banks in the business of creating money to buy government debt, an extreme tool of monetary policy called quantitative easing."

In simple terms, quantitave easing means printing money by buying the government's own debt, in essence causing a drop in interest rates, and thus weakening of the currency.

"Other things being equal, a persistently strong Canadian dollar would reduce real growth and delay a return to the inflation target,” Mr. Lane said." Ther uqestion is whetehr the "other things" will remain equal.

Here is the performance of the Canadian dollar this year:

Other countries may follow and use similar tactics. In particular I would like to pay attention to Brazil whose currency has performed spectacularly. The Brazilian situation is fairly unique as the country is rich in resources (inluding oil).

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