The trouble...

...with floating exchange rates is that they, like every other operating arm of centralized government, can be utilized for political purposes.

De-valuing the currency via QE (somewhat of a misnomer as I have pointed out in the past, the point being the intent involved) or other monetary mechanism, such as outright foreign currency purchases, amounts to instant global tariffs on imports. This is Monetary Mercantilism and as the below remarks demonstrate, the developed world is indeed mired in the quagmire.

An “international currency war” has broken out, according to Guido Mantega, Brazil’s finance minister, as governments around the globe compete to lower their exchange rates to boost competitiveness.

Mr Mantega’s comments in São Paulo on Monday follow a series of recent interventions by central banks, in Japan, South Korea and Taiwan in an effort to make their currencies cheaper. China, an export powerhouse, has continued to suppress the value of the renminbi, in spite of pressure from the US to allow it to rise, while officials from countries ranging from Singapore to Colombia have issued warnings over the strength of their currencies.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies.

A weaker exchange rate makes a country’s exports cheaper, potentially boosting a key source of growth for economies battling to find growth as they emerge from the global downturn.

The proliferation of countries trying to manage their exchange rates down is also making it difficult to co-ordinate the issue in global economic forums.

South Korea, the host of the upcoming G20 meeting in November, is reluctant to highlight the issue on the gathering’s agenda, also partly out of fear of offending China, its neighbour and main trading partner.