devaluing and negative rates

lalman

China has lowered its interest rates again… this seems to be the response for most countries. The lack of demand problems can be overcome by becoming more competitive via a devalued currency and exporting their way out of trouble.
This spells afew key things to me:

• With a floating exchange rate mechanism, with the United States main competitors ( Europe, Japan and even China) lowering rates this will keep pushing to the dollar higher and higher which will prevent the fed from raising rates due to competitiveness issues.
• If exchange rates keep dropping relatively to one another, this causes deflation and thus low and negative rates become entrenched.
• With deflation, even mild deflation it makes fiscal deficits unsustainable unless budgets get cut even further, which elongates the austerity and makes the excess supply issue even more difficult.
• Policy maker’s previous response to this is likely to be the same response moving forward and that is QE. It wouldn’t surprise me if this is a continuing trend in 2017-2019 even in the UK and US.

I think we can all agree that there are some fundamental issues:

• Demographical changes in the west – were the baby boomers are demanding less as they are trying to get there fiscal houses in order.
• There is a lack of productivity gains and thus causing wages not to go up more than inflation
• There is huge slack in the labour markets around the world that again makes wages go up less than inflation
• The savings glut (in china primarily) is having a massive once in a generation change.

So how do we solve this or can it be solved? Personally I feel that an ever rising GDP should not be the aim and the system that we live in is so fundamentally flawed – were tax revenue is literally spent on day to day projects rather than governments spending it on that specific generation… we need a different way of thinking linked to demographics and population size, so the governments around the world are flexible and can adapt to populations.
The old system was effectively based on an ever rising prosperity and ever rising population – which for me is over… and until this has been accepted by the major powers in the world, and we stop following this fool hardy approach of devaluing for short term competitive gains we could be stuck in this trap for years if not decades.
My question would be, due to the short term political structure in most regions and the fractured nature of the world economy and political landscape… is this possible?

purch

The FOMC will not set their monetary policy with too much regard to the value of the USD.