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ZERVOS: Forget 'Currency Wars'—This Is An All-Out 'Growth War'

Matthew Boesler

Currency wars? Forget it, says Jefferies managing director David Zervos – what we're about to witness is a "growth war" on a global level.

Goldman made this subtle distinction earlier. It's not about currency devaluation per se, although that is a byproduct of the monetary easing underway in some of the world's biggest economies right now.

On the contrary, it's a war over growth, Zervos writes in a note to clients, and it is a zero-sum game:

If the US, the  Eurozone or Japan went full scale nuclear......there would be no  contest. Any one of these economic areas could extract significant  growth from the rest of the world by using the currency option.


The objective for central bankers is to lower real rates  faster than the next guy – that is the essence of the growth war. The  country who gets there first wins the growth.

At G7 and G20 meetings last week, world finance ministers ruled out intentional currency devaluations vis-a-vis other countries.

So, with the era of currency wars drawing to a close, what does the "growth war" look like?

Zervos writes:

Going forward, the driving policy force for the bulk of the G20  countries will be Ben's beloved portfolio balance channel. The idea is  that central banks will use their balance sheets to reflate domestic  risk assets and drive investors into projects that will likely  generate real technological advance, real returns on capital, real  growth and real job creation.

The option of foreign asset buying does  not utilize the "virtuous" portfolio balance channel; rather it simply  reaches across the border and grabs someone else's growth potential.  Of course modest currency fluctuations will occur as relative real  rate differentials move around, but these are second order effects.  There is to be no direct currency manipulation to engineer/steal  growth. That was the marching order!

Thus, Zervos says, all currencies lose – so there's not much point in playing them against each other.

"The trade is ALL currencies against real assets," writes Zervos. "Folks may make a  little money buying MXNJPY, selling EURAUD, or selling USDNOK; but the  big money will be made in Spoos, Nikkei and and Estoxx. Currency  trades are just a poor man's reflation trade!"

Find more Zervos at Markit Hub >

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