Currency Wars: What's Real and What Isn't

Monetary policy and exchange-rate currency value are inextricably linked topics. If we get to the roots of what monetary policy is, it is all about trying to manage the supply and demand for money. At the same time, since money has to be denominated in some currency, as supply and demand for money shifts, the exchange rate value must also change. In that sense, there is nothing special about this period compared to any other period. Yet the G20 is wringing its hands about a potential currency war. Unfortunately, this is an example of where good monetary policy might be bad politics. Ironically, this is where the U.S. has much more to lose than Japan. The world would do well to let Japan do what it needs to do.

Let's start with the facts. Japan has been mired in a low growth, deflationary rut for two decades. Many, including Federal Reserve Chairman Ben Bernanke, believe that Japan would do well to accelerate money growth. Efforts to do so have been challenged by the fact that the Bank of Japan's (BOJ) short-term target rate is already zero. Therefore, to ease monetary conditions even further, Japan has been forced into other asset purchases. But even this has not caused money growth to improve, possibly due to Japan's apparent lack of commitment to the policy....437 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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