Dirk Ehnts — China devalues – euro zone’s QE policy hits a wall

Whatever the words from the ECB, quantitative easing was all about lowering the exchange rate of the euro. Why? Because aggregate demand falls short in the euro zone, way short. With 11% unemployment – now rising again – and an increase in government spending taboo, mostly because of German policy makers not understanding the fundamental importance of the role of demand, government spending and the monetary circuit, Draghi has tried to provide some help in the form of a lower euro. He also proved that the ECB buying up sovereign bonds does not lead to hyperinflation, by the way. As I have commented before, the euro zone is too big to be able to devalue itself out of a demand problem.

So, it was no surprise that China – which fixes its RMB against the USD – started to experience problems.…

The Chinese authorities reacted today and devalued the RMB by 2% against the USD….

The euro zone, by trying to beggar their neighbors – US and China, which form a dollar zone [with China's dollar peg] that has been doing much better than the euro zone – has triggered a currency war. In a world economy with insufficient demand, all countries try to secure market shares for their exporters by lowering the nominal exchange rate. This, obviously, is a zero sum game… 

econoblog 101
China devalues – euro zone’s QE policy hits a wall
Dirk Ehnts | Lecturer at Bard College Berlin