to expand on last night’s post, the “race to the bottom” is all about each country continually trying to one-up each other by taking measures to devalue their own currency. first off, currency devaluation, although it will likely come with some nasty hyper-inflationary or stagflationary effects eventually, is the only way these major countries can help manage the massive debt load that they continue to accumulate. secondarily, as the global growth continues to suffer and the odds of a new recession are quickly rising, one country or economic superpower (e.g.- Japan) can not idlely sit back while others (e.g.- the US & EU) embark on aggressive currency devaluations lest they watch their own currency rise relative to the currencies of countries that they are dependent on for exporting goods.
economics 101 tells us that when a country’s currency rises in value against another country’s currency, that exports to that country will cost “more” in relative terms, thereby falling. japan can’t afford to watch it’s exports to it’s major trading partners fall right now, nor can the US, any european nations, etc.. therefore, expect the “race to the bottom” to continue for some time to come, as one central banks’ latest money printing/currency debasing scheme is directly answered by another’s.
now, what i (almost) find amusing is the palvovian-type conditioning that traders have become accustomed to follow by bidding up US stock futures at any mention of quantitative easing. didn’t really dawn on them last night when US stock futures rocketed up on news that the BOJ finally fired back at the latest round of ECB and Fed bond purchase (currency debasement) announcements. i guess it took the QE Lemmings a couple of hours to realize that additional monetary easing by japan is net bearish for the yen, bullish for the dollar. however, i would imagine that the US & ECB step into the currency markets at some point today to help mitigate any sudden drop in the yen.