About Currency Wars and Consequences

Last weekend, G20 announced they would pause currency wars.
What is the background for currency wars and their consequences?
(Some stories are via LSR, "Actions have Consequences, Part 2")

(1) Regime to devalue local currencies is somewhat similar with tariff wars in 1930s, which aimed to support domestic economies while decreased global trade volume causing deflationary force.

(2) To boost economy each countries could increase their spending in government and consumption and investments of companies. But, currently main problem is high debt level globally, so the room for additional expenditures is limited. Moreover, if one increases government spending, they should face not only fiscal deficit but also current account deficit pressure so called twin deficit.

(3) As the consequence, many countries decided to devalue for spurring exports economy. So, they could expect to avoid twin deficit and some gains from abroad.

(4) But, this currency war should put its economy into poverty. Devaluation of currency exchange rate is not good strategy for mid or longer term. Eventually, under this condition local currency is depreciated, only exports companies could gain from abroad as earnings are calculated in devalued local currency.

(5) Someone expects these gains could transfer from companies to individual incomes. But it's only illusion. Depreciated local currency essentially raise the cost of imports, leading the burden for exports companies in light of imports of intermediate goods. So, these companies could hardly raise employees' wage or make consumer price lower to spur personal spending. It means inequality. Recent criticism against Abe-nomics in Japan is in line with this.

(6) In fact, the policies encouraging economies positively always are on a track of appreciation of currencies. We should confirm this in cases of Japan in 1990s and China started to reform economic structure from export-led to boosting private consumption encouraging commodity super cycle in mid 2000s. (See the older post about Chinese Capital Controls)

(7) But, many countries are under many constraints of debt problems, so they have been Myopia. They have pursued short-term gains only as devalue currencies.
However, as global trade volume has been decreased, the positive effect from depreciated FX rate are very constrained for now. Besides, unfortunately, earnings for multinational companies started to decrease recently.

(8) Moreover, currency wars resulted in capital outflow consequently. Global foreign reserves started to decline since 2nd half last year as seen in yesterday's Weekly Strategy post. This movements from oil producer nations and China at first started to make global liquidity conditions very tight.

(9) Furthermore, we are facing the possible Fed's fund rate hike. Albeit someone argues Fed should conduct another QE, Fed seems to start to normalize monetary policy. In fact, U.S. economy is somewhat solid as employment conditions continue to recover with somewhat fast pace which could lead upside potential from wage growth. Many reveal woes about strong USD, but as we said earlier, boosting potential private consumption from strong currency could be positive policy for mid and longer term economies and U.S. government and Fed seem to expect this rather than be afraid of negative effects from companies' earnings.

(10) In short, as a consequence of currency war each country's foreign reserves started to decrease and encourage capital outflow making global liquidity condition very tight even with facing Fed's fund rate hike soon. We should be very cautious to be invest any kind of bonds.