Economic malaise

The 2008 mortgage credit crisis caused massive wealth destruction – especially in the developed nations. The people generally became poorer. Consumption diminished and the economies moved into lower gear. To revitalize the economies, the governments resorted to fiscal expansion, monetary loosening and quantitative easing.

Fiscal expansion is the action of the government to speed up the implementation of physical projects. The government pumps in more money to construct better infrastructure. As a result, jobs are created and this will give consumption a boost. Hopefully, the economy will improve. The flip side of fiscal expansion is that the government will run a budget deficit. The bigger the deficit, the more venerable is the currency to depreciate.

Monetary loosening is the lowering of interest rate in an economy. It is hoped that with a lower cost of funds, entrepreneurs will borrow more money to expand their business. This will create jobs and hopefully stimulate the economy. Again, ‘cheap’ money is weak money. There is no incentive for holding this currency. Hence, its tendency to depreciate.

If the above measures don’t work, then the last resort is quantitative easing. QE is the printing of new money and pumping it into the system. The intention is to make money easily available so that businesses will boom. However, with the economy still sluggish and job creation slow, this extra money is not helping much.

Instead, this money is finding its way to the developing economies. With interest rate at near zero at home, it is more profitable to invest in countries that have positive interest rates, such as the BRIC countries. The movement of this money has the effect of driving up the currency of the investee countries. Indirectly, this is driving down the currency of the countries that practiced QE.

So, willy-nilly, if you have huge budget deficits (especially those funded by foreign borrowings), low or no economic growth and high unemployment, you currency will be under pressure. That is market forces at work.