UK's (and Europe's) problems in a nutshell

 Anything that doesn't address the core is just tinkering:

Andrew Neil

@afneil

My monologue on today’s The Times at One

@TimesRadio

1pm, live from New York: It’s only the start of the third full day of the new Trump administration but already we can see what an economic and business threat it poses to an ailing Europe, including the UK.  And it’s about much more than tariffs. Trump aims to consolidate America’s economic supremacy with lower taxes, cheaper energy, much less regulation.  It’s worth noting that taxes in Europe and the UK are already much higher than in America, energy is much more expensive and business far more highly regulated. That explains why America has come out of the pandemic downturn far more robustly than Europe.  Trump now wants to go faster on all three fronts, so that America pulls even further ahead of Europe than it already is.  As Europe continues to stagnate, America is poised to grow more. Multi-billion dollar investments in AI and other cutting edge technologies are being announced, reinforcing America’s clear technological lead.  It’s often thought high-tech business doesn’t consume as much power as the old heavy industries. You couldn’t be more wrong.  Data centres are fierce consumers of electricity, which is why Trump wants even cheaper energy — and why Europe and the UK, which has the highest electricity costs in the world, are struggling to attract these data centres.  Heavy industry in Europe and the UK is still being hollowed out. Not enough new stuff is replacing it.  In the UK alone chemical production is down 38% in just the past three years, cement production down 40%, electrical equipment down 50%. Either they close down because energy costs mean they can’t compete or they flee across the Atlantic, where energy costs are far cheaper.  It’s happening all across Europe.  Yet nobody in Europe is doing anything about it.  Far from cutting red tape, Brussels boasts, absurdly, that the EU is a regulatory superpower. Good luck with getting rich on that.  Far from cutting taxes, almost everywhere in Europe they are being increased, even though they’re already at record levels.  And far from reducing energy prices they continue to rise as Europe puts the huge cost of going for green energy generation onto everybody’s fuel bills.  It’s a hat trick of self-harm which Trump has spotted and intends to exploit.  In Britain Keir Starmer manfully struggles against all the legal constraints on growth and development, many exploited by his legal friends who’ve grown rich on lawfare.  He’s for the builders not the blockers, he claims. Which is good news. But I’d put my money on the blockers winning.  In Davos Rachel Reeves says she’ll look again at the tax regime for non-doms now that 11,000 millionaires and multi-millionaires left Britain in the past year alone to escape her high taxes. I suspect it’s too late to woo them back.  The punk left will say good riddance to them. They don't realise it’s Britain’s tax base walking out the door. Contrary to populist belief, our revenue base is hugely dependent on high earners. The top 1% of earners account for 30% of income tax revenues. The top 0.1% pay over 10% of income tax revenues.  If they go, everybody else will have to pay more tax.  Few in Britain realise this which is why wealth-destroying policies are so popular. It’s not a mistake made here in America, which is prepared to welcome companies escaping Europe’s anti-business climate and the high-earning, tax paying wealth creators that come with them.  By the end of this decade US business will likely be more dominant than ever. And Europe, Britain included, even more of a backwater. For the moment at least, there is nothing on the horizon to change that gloomy prognosis.

Negative interest rates - more info:

Negative Interest Rate Policies May Be Part Of The Problem – PIMCO

By Guest Post on February 11, 2016 3:15 pm in Business

                                           

Negative Interest Rate Policies May Be Part Of The Problem by Scott A Mather, PIMCO

Investors may see these experimental policy moves as damaging to financial and economic stability.
Central banks around the world are developing a newfound fondness for experimenting with negative interest rate policy (NIRP) despite unknown consequences and what appears to be a chilling effect on financial markets.


After initially rejecting the idea given the uncertainties and potential for collateral damage, the European Central Bank in 2014 and the Bank of Japan last month joined the central banks of Denmark, Sweden and Switzerland in negative territory. Now it seems the Fed may be warming to the idea, having gone beyond supportive innuendo to subtle preparation for potentially engaging in NIRP. (One example: The Fed’s 2016 scenarios for bank stress tests, released in late January, included as part of the “severely adverse scenario” the potential for short-term Treasury rates to fall to negative 50 basis points.)


While there is no longer any doubt about the ability or willingness of many central banks to manufacture negative interest rates, their efficacy on growth or inflation is far from certain. In fact, policymakers may have significantly underestimated the economic risks.

The new abnormal

Central bank advocates of NIRP increasingly seem to portray it as nothing more than a natural extension of conventional monetary policy. In a “normal” interest rate cycle, central banks cut interest rates to reduce nominal and real (inflation-adjusted) interest rates; the goal is to ease the burden on debtors and lower hurdle rates for investment. The belief is that lower rates (even negative ones) are always stimulative, while higher rates are always restrictive. However, risks may increase exponentially the lower rates go and the longer they stay there.


Although it is difficult to know the counterfactual because this is such an unprecedented situation, it appears that negative interest rate policy has not been especially impactful in lifting growth or inflation, or in lifting expectations about future growth or inflation. Instead, it seems that financial markets increasingly view these experimental moves as desperate and consequently damaging to financial and economic stability.


What are the potential negative externalities that could be upsetting financial markets?

Markets

At a minimum, negative interest rate policy is a contributing factor to the financial market volatility of the past few months. And contrary to current central bank dogma, NIRP is possibly one of the major catalysts behind the tightening in global financial conditions. While NIRP undoubtedly helps lower government bond yields, which in isolation represents a loosening of financial conditions, it may be causing the opposite effect on overall financial conditions: widening of credit and equity risk premiums, increased volatility and reduced credit availability from a more stressed bank system.

Moreover, NIRP may act to reduce inflation expectations embedded in financial assets rather than encourage anticipation of a return to targeted inflation. Nominal government bond yields can be decomposed into two yield components: a component that represents the expected “real” inflation-adjusted return, and a component that compensates for expected inflation. The exact decomposition is not scientifically determined; individual investors will make their own decisions. But policymakers hope that all of the downward adjustment in yield reflects a lowering of the real yield component and not the nominal yield piece that reflects inflation expectations.This seems unrealistic.


When interest rates are negative, some of the resulting lower nominal yield will tend to spill over from the real yield component into the inflation expectations component. Central banks cannot control this; the process is imprecise by nature. The result, however, is that negative interest rate policy and the lowering of nominal yields can suppress medium- and long-term inflation expectations. This is directly at odds with the central bank policy objective of returning inflation and inflation expectations to target.


In addition, negative interest rates may act to increase risk aversion and uncertainties across the financial system through portfolio decisions. As rates fall into zero or negative territory, the “safest” financial assets – government and other high quality bonds – actually become riskier! As yields are pushed into negative territory, holding these bonds represents a guaranteed loss of purchasing power if held to maturity. In essence, perceived risk-free and other high quality assets are being removed from the financial system and replaced with riskier, negative-expected-return assets. While that may encourage some investors to take more risk to compensate for loss of income, others will certainly be forced to reduce risk in response.

Macro effects

Negative interest rates represent another escalation of the so-called currency wars – these policies seem to have outsized influence on currency levels and volatilities. A beggar-thy-neighbour currency policy designed to suppress a currency’s value for competitive gain can hasten a return to protectionism and nationalistic polices, which are negatives for global growth.


Also, negative rates affect the financial system in other adverse ways. Bank interest margins are reduced and their cost of capital is increased as spreads on debt and equity expand to compensate for reduced profitability. Banks attempt to pass on these costs to consumers and businesses; they also constrain credit and raise lending rates, weighing on growth. Insurance companies and pension funds may also come under stress as potentially reduced future portfolio returns make it harder to deliver on their commitments to policyholders and pensioners.


Finally, negative interest rates also act as a tax on savers and investors who must plan on lower rates of return into the future. This, in turn, may cause an increase in savings rates, further hampering near-term growth.

Negative interest rate policy alternatives

In summary, negative interest rates may be a central bank tool that is increasingly ineffective at boosting growth and inflation, and may pose more risk to the financial system than commonly understood. It could very well be that a return to more normal monetary policy rates would beget a return to more normal economies with normal inflation expectations.


Even if that were not to be the case, monetary policies more focused on easing financial conditions by lowering credit and equity risk premiums directly (for example, asset purchase policies directed at credit and equity, or raising the inflation target) may prove far more effective than negative interest rate policies that have many unknown costs and risks and, to date, have done more harm than good.

Dear Mauldin Reader

China on the Edge, the new documentary from Mauldin Economics and Over My Shoulder is now available for you to watch—and it couldn’t be any timelier.
This fast-paced 25-minute video will take you behind the Bamboo Curtain for an insider’s perspective on what’s really going on in China.
Given its size and miraculous economic growth, what happens in China is of critical importance to every investor—doubly so given the recent sharp correction in Chinese markets.
The future of commodities, global equities, and bonds, and even the stability of world markets hang in the balance.
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Enjoy,

Good news, as far as the eye can see...

Well, perhaps not; maybe this is why economics is known as "The Dismal Science". Anyway, is prevention not better than cure? Therefore, forewarned is forearmed - I'd better put this post on before it is totally overcome with cliches! Suffice to say this is a snapshot, country by country, of the global economy in 2015 - very useful (Jasper, read about China):

HSBC fears world recession with no lifeboats left 

The world authorities have run out of ammunition as rates remain stuck at zero. They have no margin for error as economy falters

Photo: ALAMY

By Ambrose Evans-Pritchard

5:00PM BST 24 May 2015

1378 Comments

The world economy is disturbingly close to stall speed. The United Nationshas cut its global growth forecast for this year to 2.8pc, the latest of the multinational bodies to retreat. 

We are not yet in the danger zone but this pace is only slightly above the 2.5pc rate that used to be regarded as a recession for the international system as a whole. 

It leaves a thin safety buffer against any economic shock - most potently if China abandons its crawling dollar peg and resorts to 'beggar-thy-neighbour' policies, transmitting a further deflationary shock across the global economy. 

The longer this soggy patch drags on, the greater the risk that the six-year old global recovery will sputter out. While expansions do not die of old age, they do become more vulnerable to all kinds of pathologies. 

A sweep of historic data by Warwick University found compelling evidence that economies are more likely to stall as they age, what is known as "positive duration dependence". The business cycle becomes stretched. Inventories build up and companies defer spending, tipping over at a certain point into a self-feeding downturn. 

Stephen King from HSBC warns that the global authorities have alarmingly few tools to combat the next crunch, given that interest rates are already zero across most of the developed world, debts levels are at or near record highs, and there is little scope for fiscal stimulus. 

"The world economy is sailing across the ocean without any lifeboats to use in case of emergency," he said. 

In a grim report - "The World Economy's Titanic Problem" - he says the US Federal Reserve has had to cut rates by over 500 basis points to right the ship in each of the recessions since the early 1970s. "That kind of traditional stimulus is now completely ruled out. Meanwhile, budget deficits are still uncomfortably large," he said. 

The authorities are normally able to replenish their ammunition as recovery gathers steam. This time they are faced with a chronic low-growth malaise - partly due to a global 'savings glut', and increasingly to a slow ageing crisis across most of the Northern hemisphere. The Fed keeps having to defer its first rate rise as expectations fall short. 

Each of the past four US recoveries has been weaker than the last one. The average growth rate has fallen from 4.5pc in the early 1980s to nearer 2pc this time. The US fiscal deficit has dropped to 2.8pc but is expected to climb again as pension and health care costs bite, even if the economy does well. 

The US cannot easily launch a fresh New Deal. Public debt was just 38pc on GDP when Franklin Roosevelt took power in 1933, and there were few contingent liabilities hanging over future US finances. 

"Fiscal stimulus – a novel idea at the time – may have been controversial, but the chances of it working to boost economic activity were quite high given the healthy starting position. Today, it is much more difficult to make the same argument," he said. 

The great hope - and most likely outcome - is that the recent monetary expansion in the US and the eurozone starts to gain traction later this year. Broad 'M3' money data - a one-year advance indicator - has been growing briskly on both sides of the Atlantic. But nobody knows for sure whether the normal monetary mechanisms are working. 

JP Morgan estimates that the US economy contracted at an rate of 1.1pc in the first quarter, far worse than originally supposed. 

The instant tracking indicator of the Atlanta Fed – GDPnow – shows little sign that America is shaking off its mystery virus. Growth was just 0.7pc (annualised) in mid-May. It is becoming harder to argue the relapse is a winter blip or caused by temporary gridlock at California ports. 

Over 100,000 lay-offs across the oil and gas belt seem to have taken their toll. The Fed thought the windfall gain of cheaper energy for everybody else would weigh more in the balance, but this time Americans have chosen to salt away the money. 

Net saving jumped by $125bn to $728bn in the first quarter. There was no pick-up in April. Retail sales were flat. 

It is now more likely than not that US economy has dropped through the Fed's stall-speed threshold of two consecutive quarters below 2pc growth. Exactly how far below is unclear. The Fed uses its own growth measure - gross domestic income (GDI) - and this data has not yet been published. 

The stall speed concept is soft science but not to be ignored. "Output tends to transition to a slow-growth phase at the end of expansions," said a Fed research paper. 

Much now depends on China, where the economy is starting to look "Japanese". Dario Perkins from Lombard Street Research says the Chinese economy is in a much deeper downturn than admitted so far by the authorities. It probably contracted outright in the first quarter. 

Electricity use has turned negative. Rail freight has been falling at near double-digit rates. What began as a deliberate move by Beijing to choke off a credit bubble has taken on a life of its own, evolving into a primordial balance-sheet purge. 

It was inevitable that China's investment bubble would lead to vast inventory of unsold property. The country produced more cement between 2011 and 2013 than the US in the 20th Century - 

Mr Perkins said China is now in a “classic debt deflation spiral” as excess capacity holds down prices. Factory gate inflation is now minus 4.6pc. This in turn is tightening the noose further by pushing up real borrowing costs. 

The Chinese authorities have so far resisted the temptation to flood the system with fresh stimulus, fearing that this would store up even greater trouble. 

They have taken steps to offset a clampdown on local government spending and avert a “fiscal cliff” that might otherwise have occurred. They have loosened policy for banks just enough to offset the contractionary effects of capital flight. But they have not yet come to the rescue. 

This matters enormously. Andrew Roberts from RBS says China accounted for 85pc of all global growth in 2012, 54pc in 2013, and 30pc in 2014. This is likely to fall to 24pc this year. “If there is only one statistic that you need to know in the world right now, this is it,” he said. 

The effects are being felt across Asia. Japan keeps disappointing. Its exports to China have fallen 15pc over the last year. Korea is flirting with recession. 

Russia, Brazil, Argentina, and Venezuela are all contracting sharply, casualties of the China-driven commodity bust. The UN says the growth rate for the emerging market nexus (ex-China) has dropped to 2.3pc from an average of 6.5pc in the glory years of 2004-2007. 

Europe is doing better but it is hardly a boom. The eurozone is contributing little to global demand. The region has displaced China and to become the world's "saver of last resort" - or its biggest black hole in the view of critics - exploiting the weaker euro to rack up a current account surplus of $358bn. 

It is far from clear whether Europe can act as an engine of world recovery. The composite purchasing managers index (PMI) for services and manufacturing slipped in May, and new orders fell. Oxford Economics thinks the “sugar rush” from quantitative easing may be wearing off. 

HSBC's Mr King says the global authorities face awful choices if the world economy hits the reefs in its current condition. The last resort may have to be "helicopter money", a radically different form of QE that injects money directly into the veins of economy by funding government spending. 

It is a Rubicon that no central bank wishes to cross, though the Bank of Japan is already in up to the knees. 

The imperative is to avoid any premature tightening or policy error that could crystallize the danger. As Mr King puts it acidly. "Many – including the owner of the Titanic – thought it was unsinkable: its designer, however, was quick to point out that 'She is made of iron, sir, I assure you she can'."

REVISION: Greece (for EU context)

http://www.bloombergview.com/quicktake/greece

If you get a question on unemployment:

First, it tends to have detrimental effects on the individuals involved. Workers’ human capital (whether actual or perceived by employers) may deteriorate during a spell of unemployment, and the time devoted to job search typically declines. Both factors imply that the chances of leaving unemployment fall the longer it goes on. More generally, long-term unemployment adversely affects people’s mental and physical wellbeing and it is one of the most significant causes of poverty for their households."

This is from an article looking at the situation in Greece:

http://www.telegraph.co.uk/finance/economics/11554873/Why-theres-little-hope-for-Greeces-unemployed.html

Nouriel Roubini on anti-globalisation moves:

Nouriel Roubini 

Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration.

The Great Backlash May 2014

NEW YORK – In the immediate aftermath of the 2008 global financial crisis, policymakers’ success in preventing the Great Recession from turning into Great Depression II held in check demands for protectionist and inward-looking measures. But now the backlash against globalization – and the freer movement of goods, services, capital, labor, and technology that came with it – has arrived.

This new nationalism takes different economic forms: trade barriers, asset protection, reaction against foreign direct investment, policies favoring domestic workers and firms, anti-immigration measures, state capitalism, and resource nationalism. In the political realm, populist, anti-globalization, anti-immigration, and in some cases outright racist and anti-Semitic parties are on the rise.

 

These forces loathe the alphabet soup of supra-national governance institutions – the EU, the UN, the WTO, and the IMF, among others – that globalization requires. Even the Internet, the epitome of globalization for the past two decades, is at risk of being balkanized as more authoritarian countries – including China, Iran, Turkey, and Russia – seek to restrict access to social media and crack down on free expression.

 

The main causes of these trends are clear. Anemic economic recovery has provided an opening for populist parties, promoting protectionist policies, to blame foreign trade and foreign workers for the prolonged malaise. Add to this the rise in income and wealth inequality in most countries, and it is no wonder that the perception of a winner-take-all economy that benefits only elites and distorts the political system has become widespread. Nowadays, both advanced economies (like the United States, where unlimited financing of elected officials by financially powerful business interests is simply legalized corruption) and emerging markets (where oligarchs often dominate the economy and the political system) seem to be run for the few.

For the many, by contrast, there has been only secular stagnation, with depressed employment and stagnating wages. The resulting economic insecurity for the working and middle classes is most acute in Europe and the eurozone, where in many countries populist parties – mainly on the far right – outperformed mainstream forces in last weekend’s European Parliament election. As in the 1930’s, when the Great Depression gave rise to authoritarian governments in Italy, Germany, and Spain, a similar trend now may be underway.

If income and job growth do not pick up soon, populist parties may come closer to power at the national level in Europe, with anti-EU sentiments stalling the process of European economic and political integration. Worse, the eurozone may again be at risk: some countries (the United Kingdom) may exit the EU; others (the UK, Spain, and Belgium) eventually may break up.

Even in the US, the economic insecurity of a vast white underclass that feels threatened by immigration and global trade can be seen in the rising influence of the extreme right and Tea Party factions of the Republican Party. These groups are characterized by economic nativism, anti-immigration and protectionist leanings, religious fanaticism, and geopolitical isolationism.

A variant of this dynamic can be seen in Russia and many parts of Eastern Europe and Central Asia, where the fall of the Berlin Wall did not usher in democracy, economic liberalization, and rapid output growth. Instead, nationalist and authoritarian regimes have been in power for most of the past quarter-century, pursuing state-capitalist growth models that ensure only mediocre economic performance. In this context, Russian President Vladimir Putin’s destabilization of Ukraine cannot be separated from his dream of leading a “Eurasian Union” – a thinly disguised effort to recreate the former Soviet Union.

In Asia, too, nationalism is resurgent. New leaders in China, Japan, South Korea, and now India are political nationalists in regions where territorial disputes remain serious and long-held historical grievances fester. These leaders – as well as those in Thailand, Malaysia, and Indonesia, who are moving in a similar nationalist direction – must address major structural-reform challenges if they are to revive falling economic growth and, in the case of emerging markets, avoid a middle-income trap. Economic failure could fuel further nationalist, xenophobic tendencies – and even trigger military conflict.

Meanwhile, the Middle East remains a region mired in backwardness. The Arab Spring – triggered by slow growth, high youth unemployment, and widespread economic desperation – has given way to a long winter in Egypt and Libya, where the alternatives are a return to authoritarian strongmen and political chaos. In Syria and Yemen, there is civil war; Lebanon and Iraq could face a similar fate; Iran is both unstable and dangerous to others; and Afghanistan and Pakistan look increasingly like failed states.

In all of these cases, economic failure and a lack of opportunities and hope for the poor and young are fueling political and religious extremism, resentment of the West and, in some cases, outright terrorism.

In the 1930’s, the failure to prevent the Great Depression empowered authoritarian regimes in Europe and Asia, eventually leading to World War II. This time, the damage caused by the Great Recession is subjecting most advanced economies to secular stagnation and creating major structural growth challenges for emerging markets.

This is ideal terrain for economic and political nationalism to take root and flourish. Today’s backlash against trade and globalization should be viewed in the context of what, as we know from experience, could come next.

Read more at http://www.project-syndicate.org/commentary/nouriel-roubini-likens-the-rise-of-nationalism-today-to-that-of-authoritarian-regimes-during-the-great-depression#mypu6W3LjXyClBQD.99

Sweden, negative rates & currency wars

Exceptional economic conditions indeed. AEP looks at the circumstances forcing different central banks to take extraordinary measures to protect themselves, including fighting currency wars. This has important implications elsewhere, as he explains. There are also 2 handy little videos in here covering QE & deflation. BTW, well done AS students who pointed out Sweden has gone negative - I did not see it until I got home and had time to look at the news.

Daily Telegraph/AEP - Sweden takes rates negative (who is next?)

By Ambrose Evans-Pritchard

4:58PM GMT 12 Feb 2015

684 Comments

Sweden has cut interest rates below zero and launched quantitative easing to fight deflation, becoming the latest Scandinavian state to join Europe’s escalating currency wars.

The Riksbank caught markets by surprise, reducing the benchmark lending rate to minus 0.10pc and unveiled its first asset purchases, vowing to take further action at any time to stop the country falling into a deflationary trap. The bank presented the move as precautionary step due to rising risks of a “poorer outcome abroad” and the crisis in Greece.

Janet Henry from HSBC said the measures are clearly a “beggar-thy neighbour” manoeuvre to weaken the krone, the latest such action in a global currency war that does little to tackle the deeper problem of deficient world demand.

 

 

 

The move comes as neighbouring Denmark takes ever more drastic steps to stop a flood of money overwhelming its exchange rate peg to the euro and tightening the deflationary noose.

The Danes have cut rates four times to minus 0.75pc in a month to combat fall-out from the European Central Bank’s forthcoming QE. They have even taken the unprecedented step of halting all issuance of government bonds.

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• What would happen if the base rate was cut to 0pc?
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  28 Oct 2014
• AEP: Devaluation by China is the next great risk for a deflationary world 
  04 Feb 2015
• Sweden cuts rates to avert deflation after mutiny 
  03 Jul 2014

Jens Nordvig from Nomura said the Danish central bank has spent €32bn so far this year intervening in the exchange markets to defend its euro peg in the Exchange Rate Mechanism, almost 10pc of GDP. “This is the fastest pace of reserve accumulation by the Danish National Bank in its history. There is no doubt that the pressure on the krone is very significant, and that the fight for the peg will be tough,” he said.

Steen Jakobsen from Saxo Bank said a rupture of Denmark’s euro-peg would be dangerous since the country’s private pension system is heavily invested in EMU bonds and assets, yet its liabilities are in Danish krona.

“There is a currency mismatch which could leave some of these pension funds technically insolvent. I wager that if push comes to shove, Denmark would rather join the euro than allow a 10pc revaluation. It could happen very fast if things come unhinged in Greece,” he said.

The fall-out from QE in Europe has already smashed Switzerland’s currency defences, triggering a 14pc surge in the franc against the euro and threatening to erase the last safety buffer for struggling Swiss exporters.

Exchange rate mayhem in Europe is matched by a parallel saga in Asia, where Japan’s vast monetary stimulus and barely disguised efforts to drive down the yen are causing heartburn in China.

The Chinese yuan is linked to the US dollar through a “dirty float”. Yet the dollar is rising relentlessly against other Asian currencies as the prospect of monetary tightening by the Federal Reserve lures a flood of capital into the US, a replay of the strains that led to the East Asia crisis in 1998.

This is compounding China’s problems at a delicate time when the economy is already facing a property crunch. The country’s factory gate deflation has deepened to minus 4.3pc.

China’s yuan has jumped 50pc against the yen since early 2012. There are growing fears that China may be forced to drive down the yuan to protect its export base and avert a possible hard-landing. This would transmit a deflationary shock worldwide, given the sheer scale of China’s excess capacity.

Manoj Pradhan, Morgan Stanley’s global economist, said the world is revisiting the “ghosts of the 1930s” as one country after another tries to steal a march on others by getting in devaluation first. “The lesson from the 1930s is that those who do so early benefit at the expense of those who wait too long,” he said.

Mr Pradhan said it is becoming harder to extract advantage from this ploy now that “everyone is doing it”. China faces strong pressure to defend itself while it still can. “The longer they wait, the harder it will be for China’s policy-makers,” he said.

The United States has so far acquiesced in the surging dollar but there are growing calls for a shift in policy on Capitol Hill. Both Republicans and Democrats in Congress back new legislation that introduces binding currency rules for trade deals and imposes punitive import taxes on countries deemed to be “currency manipulators”. The move is explicitly aimed at China and Japan, but might also include Germany given the size of its current account surplus.

Sweden also risks falling foul of Washington. The Riksbank’s move has raised eyebrows since the bank itself says economic growth is picking up. The country is in the midst of a property boom and mortgage debt is already 81pc of GDP, one for the highest ratios in the world. It is extraordinary to launch QE in such circumstances.

The Riksbank insists that the only motive is to stave off deflation but there are widespread suspicions that Sweden is in fact protecting its industrial and export base. It is no stranger to controversy. The oldest central bank in the world, it took radical action early in the 1930s to liberate Sweden from the constraints of the Gold Standard. Its prescience shielded the country from the worst of the Great Depression.

Stephen Lewis from Monument Securities says the emergency actions are getting out of hand: “The chief threat from a global currency war is that it will lead central banks to take up monetary stances so extreme that they damage the smooth functioning of financial markets. It is remarkable that they should be closing their minds to the possibility that they are undermining the basic motive to save and invest as they blindly wage their currency wars.”

 

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