What we “assume” can make an “ass of u and me“, as the proverb says. And that is certainly true of the way central banks have manipulated the major currencies since the financial crisis began in 2008, as the chart shows of the US$’s movements versus the Japanese yen and the euro:
- It shows the change relative to December 2007 values, before the central banks realised the crisis was underway
- All 3 currencies were relatively stable in early 2008, but then performed quite differently
- The dollar began a 30% fall against the yen, and became quite volatile against the euro
- But Premier Abe’s election in December 2012 then led to the dollar soaring against the yen
- 2014 saw the European Central Bank making a similar decision to devalue versus the dollar
These moves were all created by central bank policy. At first, Japan and the European Central Bank were happy to let the US Federal Reserve weaken the value of the US$. They believed that this would help the US economy to recover, and so rebuild momentum in the global economy. But then they had second thoughts.
They had slowly realised that the Fed’s policy hadn’t worked, and that their economies were not recovering back to pre-2008 levels. Instead they hoped that devaluation would enable them to boost exports at the expense of the US. But they failed to recognise that China’s policies were also changing:
- China began its New Normal policies in 2013, reducing its massive stimulus programmes
- Global growth, measured in current dollars, fell to just 2%/year between 2012 – 2014 and declined 4.9% in 2015
In due course, the Fed then realised the US economy was suffering. And so in Q1 this year, it decided to devalue again. The dollar has therefore weakened against both the yen and the euro since the start of the year.
The problem all comes back to false assumptions.
One core central bank assumption is that their computer models can forecast the economy. A second is that they can create demand by printing money. A third is that demographics change doesn’t matter – they really do believe that a world full of 80-year olds would grow as fast as a world full of 30-year olds.
Common sense, of course, tells us that all these assumptions are wrong. Inevitably, therefore, their policies of devaluation and money printing do not create the growth they expect. Instead, they make life even more complex and difficult for companies and investors – and end up helping to destroy growth rather than create it.
Ordinary people like ourselves then end up taking the pain from their mistakes – making an “ass of u and me“.