The big battle is being fought between the Americans and the Chinese. On the one hand, there is a desire to inflate away the debt problem. On the other, a need to deflate to moderate inflationary pressures.
And the differences do not end there. The US would like to see the Chinese currency higher against the dollar to protect American manufacturers. The authorities in China do not take kindly to this sort of pressure and are resisting the attempts. The outcome could be trade barriers.
The UK appears caught in the crossfire. The dollar is falling in value – even against sterling. But the pound has been sinking too – most notably against the euro.
Like the US, it seems we are using inflation as a means of devaluing debt. Last week, the euro stood at 88p. Heaven knows what it is today but visitors to the Eurozone complain at the price of meals and goods. The European Central Bank appears out of step with the Anglo-Saxon economies.
The difference in approach can be put down to monetary policy as Monsieur Jean-Claude Trichet is setting out his stall against further easing. More seems likely in both the US and the UK. But whether the ECB’s stance will prove sustainable, given the pressures present among members of the single European currency, is debatable. Warren Buffett issued a warning about the euro only last week.
Meanwhile, Japan is also trying to lower the value of the yen – not that they have much scope, given the near zero level of interest rates. So we have the US, China and Japan – the three biggest economies in the world – all seemingly locked in conflict over which should enjoy the biggest competitive advantage in trade terms. They cannot all win.
It is not only the euro that is demonstrably rising – and this despite the fact that plenty of European countries need a cheaper exchange rate.
Thailand’s government approved a series of measures last week to restrain the rise of the baht and Brazil has also acted to contain its currency’s rise.
Yet finance ministers around the world seem content to let the dollar fall. At some stage, some greater international co-operation may be needed.
For investors, it makes the business of choosing where to invest that much trickier.
Our own FTSE 100 index has been in good heart as a consequence. With so much of the revenue of the constituent companies derived from outside the UK, this particular segment of our market has looked a good hedge against the vagaries of sterling. But the real issues are that much wider.
While a falling currency does produce opportunities for exporting businesses, it can also stoke the fires of inflation. Weak sterling alongside the upcoming VAT rise here does not augur well for our own cost of living indices.
And if the comprehensive spending review tips us into a second downward leg in the economy, we could be facing that dreaded condition known as stagflation.
As for the China/US conflict, it may yet spill out into market turmoil.
Brian Tora is a consultant to investment managers JM Finn & Co