Brazilian Finance Minister Guido MantegaEraldo Peres
Brazil's Finance Minister made waves on Monday for his comments about a "currency war" being waged internationally, but Guido Mantega really only said what everyone already knows, or at least suspects: The world's exporting nations are actively trying to drive down the value of their currencies to drive up their competitiveness in export markets.
There may be other motives at work, too, though. The blogger Calculated Risk pointed out that now-Federal Reserve Chairman Ben Bernanke said in a 2002 speech that devaluation also works to head off deflation. "A striking example from U.S. history is Franklin Roosevelt's 40 per cent devaluation of the dollar against gold in 1933-34 enforced by a program of gold purchases and domestic money creation," Mr. Bernanke said. "The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly."
Of course, deflation has become a hot top recently. In the United States, the consumer price index rose just 1.1 per cent August, over last year. After excluding food and energy items, CPI rose a mere 0.9 per cent, putting it perilously close to deflation. It also prompted the Fed to say in its most recent financial policy statement that it is prepared to act to return inflation "to levels consistent with its mandate."
Little wonder, then, that gold is doing what it is doing, as investors look for an alternative to devalued currencies. While treading water on Monday, gold recently spiked to a record high of $1300 (U.S.) an ounce.
David Berman