Currency wars are back

Another round of U.S. dollar devaluation is on the cards and this time it’s not just the emerging markets that may suffer.

This week Switzerland threatened aggressive action to stop the Franc rising while other countries from Norway to Japan are struggling in the face of U.S. monetary stimulus and a flight from the euro.

Brazil’s finance minister this month warned that another round of money printing would further overvalue emerging market currencies, driving them countries deeper into recession.

Russian Prime Minister Vladimir Putin has criticized on several occasions the U.S. policy of printing cash (it is actually created electronically) for boosting inflation and shortterm speculative money flows.

The U.S. Federal Reserve has been waiting for President Obama’s administration to tackle first the national debt and second the absence of either jobs or economic recovery.

The Whitehouse press secretary said the president would on Thursday announce measures that would attract bipartisan support and have a big and rapid impact on the economy.

That is unlikely to dampen fears that the administration is locked down in a partisan wrestling match, unable to do more than score political points as loudly as possible.

That leaves the real action outside the ring. The Federal Reserve chairman Ben Bernanke may act if the economy continues to weaken.

A likely diary date is September 20-21, when the Federal Open Markets Committee meets. At its last meeting the Federal Reserve pledged to hold down interest rates until at least 2013.

Since then it has become clear that this is no jobless recovery. The U.S. economy continues to shed jobs and there is still no recovery.

Nor, as some commentators argue, are developed countries entering a double-dip recession. Stimulus measures provided merely a temporary respite: the printing of money, the nationalization of banks and some industrial companies, along with car scrappage schemes and attempts to stimulate retail spending.

As each of these schemes ends, a sector of the economy slips back into a crisis of unsustainable debt and falling asset values. So it is hardly surprising that neither the Federal Reserve nor the Bank of England seemed eager to launch another round of quantitative easing.

But ease they must, because governments are doing little to stimulate the economy. Moreover, the European Central Bank, the European Commission and the German leadership are pursuing austerity.

Devaluation in the U.S. dollar and euro blocs remains the biggest economic challenge for the world outside.

Read other articles of the print issue “The Moscow News #69”

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