The attempt by the government and the Fed to print its way to prosperity may set off a global currency war. From DW News:
Brazil's finance minister first spoke of a currency war in 2011. Now the battle lines are hardening as Japan opens a new round in the race to see which country can weaken its currency fastest.
"I do not want to say that I can look at Japan at the moment without any concern," German Chancellor Angela Merkel said at the World Economic Forum in Davos.
What the chancellor is concerned about is Japan's intention to flood the market with yen as a way of ending deflation in the country. By throwing the printing presses into high gear, the Bank of Japan makes the yen cheaper, which helps the country's exports.
Japan is not the only country to take a relaxed view of monetary policy. The US Federal Reserve found a new name for printing up new batches of dollar bills: quantitative easing. Since the beginning of the financial and economic crisis, the US central bank has dropped interest rates to close to zero and bought up trillions of dollars in government bonds.
"The danger is that we all loosen our currency policy to try and get out of the crisis," Achim Wambach, director of the Institute for Economic Policy at the University of Cologne, told DW.
One currency's devaluation generally leads to another's appreciation. This has meant that Brazil has suffered from the new money printed by the Fed. The Brazilian real has increased in value by nearly 50 percent within two years, leading the Brazilian finance minister to say that there was a currency war going on. South Korea has found itself negatively affected by the Bank of Japan's decision. Both Asian countries sell automobiles and electronics around the world, but as the South Korean currency, the won, increased in value by a third compared the yen many South Korean exporters have seen their exports decline.
China, the world's second largest economy, is both a perpetrator and victim of the currency war. The People's Bank of China has bought up massive amounts of US bonds to prevent the yuan from increasing in value and watched its exports soar. Now the country is watching as the value of its dollars melts away. The still expensive yuan, along with declining consumption in industrialized countries, has also created problems for Chinese exports.
While the value of the dollar sinks and that of the yuan rises, the euro has gone through the roof. Despite the European Central Bank leaving key interest rates at a historically low level, buying up bonds from struggling countries and opening the gates for lending, the euro remains high.The Feds' policies haven't brought the U.S. out of the economic doldrums, even though they have temporarily boosted the financial markets. However, even that may be coming to an end, with signs of possible financial bubble within the next few months.
What could force a sudden decline in stock prices? Well, it could simply be a market adjustment. Or, it could be a spike in a primary industrial and economic input--the price of oil. We are nearing the time that Israel may take action against Iran, although Obama reportedly will fly to Israel to personally attempt to dissuade the Israelis from taking any military action.
Frankly, I am concerned by the possibility of social unrest. Besides the threat of economic crisis, we now face a federal government and state governments that are moving quickly to register and outlaw private ownership of firearms. There has been significant push back, including warnings of armed resistance. (See also here). In times like these, it is no consolation whatsoever that the President claims the authority to secretly, and without due process, order the execution of American citizens.