History shows that the best thing a country can do to get out of dire financial straits is to make structural reforms.
But it can take years – long, difficult years – for the country that's attempting reform, and the politicians responsible have a funny way of not getting re-elected.
So many countries opt for the "currency war" method, artificially debasing their currencies. It works fast, it's politically expedient, and improved exports mask inflation in other sectors of the economy.
Now we have proof from the International Monetary Fund, which is meeting in Peru right now, of why countries are using this method more often today. The IMF has released a strategically timed report that confirms currency devaluation is effective at boosting a nation's GDP.
Currency wars don't really help in the long run, of course. Debt weighs even more heavily, and the piper must always be paid. But these bouts of manipulation can create huge opportunities for savvy investors…
"Cheap Growth" Is Irresistible
According to the Washington-based IMF, the world's lender of last resort, currency manipulation since the financial crisis has been "unusually large."
Norway is a great example. It's facing unemployment at 11-year highs.
The country, which isn't a member of the European Union (EU), has been hit especially hard over the past few years. That's thanks to its dependence on oil and natural gas, which account for a whopping 67% of exports and 22% of GDP.
Meanwhile, its currency, the krone, has lost 21% in the last year. In September, the Norges Bank unexpectedly cut interest rates for the second time this year – the third time in the past 10 months – and economists are forecasting even more rate cuts to come.
Manipulation fever is catching in Norway's European neighborhood. Germany has just reported that its annual inflation turned negative in September, falling by 0.2%. That was the first fall in eight months, and the plunge has raised the specter of below-zero rates in the Eurozone. That could in turn spur the European Central Bank (ECB) into even more quantitative easing (QE) on top of its current €1 trillion ($1.12 trillion) bond buying.
Now the sort of bandwagon effect that can make currency wars seem absolutely contagious is in full swing.
The emerging markets are beginning to look at the kind of manipulation that the EU, United States, and Japan have pulled off.
And, long-term consequences aside, they like what they see.
More Countries Join the Race to the Bottom
Malaysian Prime Minister Najib Razak, who, thanks to a Malaysian constitutional quirk, is also Finance Minister, announced a few weeks ago that his government would be injecting $4.6 billion into the state investment fund to help shore up its foundering stock market.
The oil-exporting nation is hurting thanks to weak oil prices. That dented its currency, the ringgit, which has seen 26% of its value sliced off versus the U.S. dollar in the past year. We can expect it to slide even more as the government moves to make its exports more attractive.
For its part, India has just lowered key interest rates by 50 basis points (more than was expected) as it struggles with slowing economic growth. It's the country's fourth cut year to date.
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.