Currency war isn't a zero sum game, Bernanke argues
In a post titled What did you do in the currency war, Daddy? former Fed President Ben Bernanke fires back at critics of currency weakening.
He says that giving a weak currency all the credit for tightening is a mistake.
"An easing of monetary policy does work in part by depreciating the currency, which, all else equal, tends to increase the easing country's exports and reduce its imports. But all else is not equal, since an easing of monetary policy, by lowering interest rates at home, also stimulates domestic demand, employment, and incomes. Higher incomes in turn lead to more imports, as consumers and firms buy foreign as well as domestic products."
The obvious rebuttal is: How much of the subsequent is due to FX and how much due to easing. Another round of QE may lower 10-year yields by 20 bps but knock 10% off the currency. In my mind that means about 95% of the benefit comes via the currency. He argues it's much less.
Overall, he makes a clear, comprehensive case and backs up his ideas with academic studies. The proof, I think, will come in how much the US struggles in the next few years with a strong dollar. Yesterday's six-year low in the ISM manufacturing index isn't a great sign.
