The race to the bottom

2009 should be a lively year in the currency markets with some major shake-outs and competitive devaluations.

The 'idea' is that a weak currency stimulates exports and helps pull an economy out of recession. On the other hand, a strong currency (boo hiss) would reduce exports and hence make a recession deeper and more prolonged.

So why have a strong currency? Errrm, maybe because you would be more wealthy as a nation! Goods would be cheaper, holidays would be cheaper, etc etc. What a horrible idea!

A strong currency is also associated with deflation for the same reason (cheaper things) whilst a weak currency is associated with inflation (more expensive things). Deflation makes debt seem bigger whilst inflation magics debt away.

The problem we have is that exporters (Germany, China, Japan) want a weak currency to keep their export markets strong and highly indebted countries (UK, US, Spain) also want a weak currency to inflate their debts.

And so we have a race to the bottom. Let's see who 'wins' in 2009...