Draghi’s Dovish Remarks: Prelude to a Global Deflationary War?


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By Remberto Latorre-Artus

Yesterday afternoon, The Economist-endorsed official has signaled that the ECB is ready for further QE. Draghi’s dovish stunt came as no surprise to policymakers and investors, since they are perfectly aligned with a deflationary spiral bogey, quite trendy around the world today. What is yet to be seen is whether this silly fear will trigger a new deflationary war.

A deflationary war is simply a new form of currency war, since the “aggressor” is, once again, the monetary monopolist through its excesses of liquidity injections. It is a deflationary war because these monetary stimuli allow the monopolist to export deflation to other regions of the world.

The process by which the deflation is exported is simpler than it seems. The HSBC explains it: “for every exchange rate decline, there has also, inevitably, been an exchange rate rise. And for those who have experienced ‘unwanted’ exchange rate gains, inflation has ended up lower than expected and, often, lower than desired.” While delivering its argument, the HSBC cited the euro zone’s “lower-than-expected inflation” during last year’s second half.

This scenario is plausible only if the “unconventional” QE policies work their way through the exchange rate and manage to transfer the unwanted deflation to its foreign recipients. Recent evidence from the Japanese Keynesian Abenomics and the Fed’s infamous monetization of debt suggests that this is exactly the case, where monopolists expect to gain a dirty comparative advantage, or in other words, manipulate a dirty-float until they reach the targeted exchange rate.

This has naturally awakened Draghi’s appetite to follow suit. By now, there is no doubt in their minds that printing stratospheric amounts of money will help them tilt the exchange rate to their favor, and even improve their balances of trade. However, here lies the slippery slope: everybody is dancing at the same beat, so they cancel each other out! In fact, deflation is already crushing QE efforts, so each monopolist engages in new and fancier rounds of QE, and the junky-type party never ends.

In a nutshell, the current paradigm seems to reflect what Steven Pearlstein once called: “Keynes on steroids.” But this is no joke. Nothing could be more serious than a currency/deflationary war. The main problem is that this war works as a ponzie scheme, and as such, when QE eventually ends, so will the scheme. And when that happens, the main currencies of the world will face a great shock. The Euro, however, may experience more than a shock but disintegration. As Professor Friedman correctly predicted, the Euro zone member States are too diverse and as such, the Euro is likely to suffer more instability than a dollar or yen.

That being said, there are some market alternatives flourishing over the past few years that offer some ground to remain positive. Even if Draghi decides to follow suit and re-starts the printing press in Europe, we are at the awakening of a new paradigm offered by the emergence of decentralized crypto currencies.

Of course, it is still early to predict the future of these virtual monies, but an alternative has already been offered. The market has taught us what some Austrian Economists, like Hayek, have long predicted and advocated: as long as people accept these new monies as a viable means of exchange and give them an intrinsic subjective value, these concurrent currencies will not die. On the contrary, they will flourish to offer a viable alternative to the ever less “unconventional” policies that have been watering down the value of the fiat monies.

One of the main reasons to remain positive is the decentralized supremacy provided by these organic currencies and thus, the impossibility to manipulate the growth rate. A second reason is the growth cap, which allows individuals to figure out—and thus, effectively value—the truthful future amount of these competitive currencies. And the third and more important is the difficulty to seize its trade, growth and performance by state officials.

Be that as it may, these digital monies might disappear because of future regulatory intervention; however, the market won’t stop at crypto currencies. New technology will find its way to offer other organic solutions that will either substitute for the centralized monopoly of the money supply, or at least offer effective competition and as such, constraint today’s printing madness.

From that perspective we should not fear in excess, because in the long run, the market will take care—as it always has—of the misallocation of resources and of the excess waste that emanates from our well-intended central planers.

A global deflationary war is right around the corner and might very well unfold tomorrow, but make no mistake: the market will find the patch to the future unintended consequences of this silly war.


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