In case you haven’t noticed, the world’s central banks are locked in an epic race to the devaluation bottom in desperate pursuit of a post-crisis economic recovery that never came despite trillions in worldwide QE and on August 11, in the currency war equivalent of the United States entering World War II, China devalued the yuan, serving notice that, to quote Xi Jinping, "the lion has woken up."
China’s move has sent shockwaves through the emerging market world and caused the Fed to reconsider the timing of the ever elusive "liftoff" and now, with the sputtering engine of global growth and trade set to export its deflation across the globe, countries like India and South Korea must decide how to respond.
Because we know the mechanics of the currency war and the endless loop of competitive easing can be a bit confusing at times, we present the following simplified, circular flow chart from Morgan Stanley which should serve as a helpful guide to the never ending "beggar thy neighbor" loop.
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From MS:
At the beginning of the game, the global economy is at an arbitrary point of equilibrium, similar to a chess board, with the pieces representing policy tools that are used to achieve one’s goal—growth and inflation—the king. Once a central bank makes an initial move to achieve a new equilibrium, it sets in motion a sequence of moves from other central banks, which we refer to as the opening repertoire. Suddenly, the game becomes unbalanced and requires more policy changes until a new equilibrium is achieved.
