World War ¥€$


In a world of slowing growth, currency debasement has become the economic weapon of choice.

In the last month alone, we have seen central banking easing measures announced in Romania, India, Switzerland, Egypt, Peru, Denmark, Turkey, Canada, the Eurozone (QE), Pakistan, Albania, Russia, Australia, and China.

More cuts are on the way, we are told, as there is seemingly no end in sight to the tit for tat moves of this global currency war. If we look around the world at the major central banks, with the exception of Brazil (who has been forced to hike because of high inflation), everyone is in easing mode.


Even Russia reversed course in January and cut rates by 2%, shocking everyone after their emergency rate hike in December. Despite year-over-year inflation of 15%, the Russian central bank was under intense pressure to lower rates from industry and commercial banks.

Zero-bound No More

As we have seen, 0% is no longer the lower bound when it comes to central bank actions. After reaching 0%, they have moved to quantitative easing (as was done in the U.S., Japan, and the UK) or the previously unthinkable: negative interest rates.

Last June, the ECB moved its deposit rate to -0.2%. After a few months, this was viewed as “not enough” to crash the Euro and the pressure started building for a full-scale quantitative easing program. The ECB delivered a few weeks ago with a €1.1 trillion plan. With rates already at all-time lows across the Eurozone, the intention of the asset purchase program was clear: debase the Euro.

In response to these actions, Switzerland has moved its target rate down to -0.75% and Denmark moved its benchmark deposit rate to -0.5%. The moves are not over, though, as Denmark is expected to cut its benchmark deposit rate to -1% this week.

Taking a page from the Mario Draghi playbook, Denmark’s Central Bank Governor Lars Rohde has pledged to do “whatever it takes” to keep the Danish krone from appreciating. This may include their own quantitative easing program to further push down yields, Rohde said in a recent interview.

If Everyone Debases, No One Debases

The absurdity of the global race to debase and believing it is a panacea for slowing global growth is clear.  Currencies are all relative and if everyone debases, no one debases. Even if we assume that you can debase and benefit via improving exports, by definition someone else is hurt. Unless you believe that debasement lifts overall global growth, this is a mathematical fact.

Over the past year, as we have seen attacks and counterattacks across the globe, what has really occurred is a broad depreciation against the U.S. dollar. This is clear when looking at a chart of the Australian dollar, Yen, Euro, Canadian Dollar, and British Pound against the U.S. dollar.


When viewed against one another, the advantages are less clear. If we are to believe that these countries are debasing their currencies in order to boost exports and growth, then U.S. exports and growth must in turn suffer as a result. Someone has pay the price as there is no free lunch in currency war games.

Where there has been a free lunch thus far is in the stock market, as the prevailing narrative is that when Japan, Europe or anyone else debases it is bullish for all stocks. This is entirely sentiment driven, of course, and will continue as long as faith in central banking is intact.

From Stability to Volatility

On that point , faith in central bankers to solve the world’s economic problems has never been higher, but the effect on markets seems to be slowly changing. For years central bank actions have been a source of stability and calm, but they are increasingly becoming a source of volatility.

This volatility will likely continue as the currency wars intensify and markets become more and more dependent on the continuation of easy monetary policy.

Ending the War and Saving Capitalism

Is there any hope for an end to the currency wars? Perhaps. There is a now a growing consensus that the U.S. Federal Reserve will make a peace offering with a rate hike by the middle of this year. This will be the first increase in rates for the U.S. since 2006, over nine years ago.

There is much debate today over whether they will or should go through with such a hike given the ongoing easing in the rest of the world. The rising dollar is already putting pressure on U.S. company earnings and this could intensify if the Fed chooses to finally raise rates.

But the alternative, doing nothing, may be more harmful still as the unintended consequences of distorting market rates is becoming more and more obvious the longer the Fed stays at 0%. As Bill Gross said recently, the Fed needs to raise interest rates to “save capitalism” which depends on the “rational hope that an investor gets his or her money back with an attractive return.”

Will the Fed choose to “save capitalism” or continue with the command economic system that has been serving the short-term interests of financial assets to the detriment of the real economy? I would like to think that Janet Yellen and the other voting members will choose capitalism but they cannot serve two masters. They either need to abandon the Bernanke “wealth effect” theory or continue the status quo.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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