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Global financial markets have suffered from selfish decisions made by central banks in various countries. There have been talks of currency wars coming from emerging markets trying to manipulate their currencies in order to get the best pricing for growth. Now, there has been currency competition within developed countries. The Fed recently decided to halt its quantitative easing operation which purchases bonds to lower long-term interest rates. When the government owns most of these bonds, the supply to the public is decreased which lowers yields and raises the prices of these bonds.
Shortly after the Fed halted its quantitative easing efforts, Japan announced that it plans to expand its monetary base in order to increase inflation. Japan’s effort is being referred to as quantitative and qualitative easing, or QQE2. Japan has been buying both bonds and specific assets in order to drive these asset prices up and lower their yields. The hope is that this will export deflation to the rest of the world and help Japanese exporters compete by lowering prices. However, if this effort fails and inflation can’t be generated, some analysts say that default may be preferable to stagnation.
The “currency wars” between both emerging markets and developed countries are a dangerous territory for all. Selfish decisions made by a country's central bank can lead to another country making similar decisions in order to compensate. As more developed countries look to manipulate their currencies through bond sales and purchase programs, it will be interesting to see if there is ever a stop to the debt crisis. How do you think countries should react to the current situation? Do you think that the United States and Japan are doing the right thing by manipulating their currencies?
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