In an op-ed in today’s Wall Street Journal entitled “Beware the Currency Wars of 2015”, Mike Newton, a former macro trader for Caxton Associates LLC and global head of emerging market FX strategy for HSBC, argues that global policy coordination among nations and central banks is called for to manage what otherwise will be all out currency wars later this year.  Absent such coordination, there will be a race to the bottom as nations devalue their currencies in order to stimulate exports and growth that years of artificially low interest rates have failed to bring about.  Indeed, to avoid a no-win situation, Mr. Newton goes so far as to suggest that “[t]he world may ultimately be heading toward a global managed exchange rate regime.”

Mr. Newton’s prescription, however, misses the root cause of the problem he describes and therefore his solution is misdirected. The solution is not to implement more coordination among the world’s central banks, but to curtail central bank interventions into domestic economies in their attempt to remedy market distortions, including global trade imbalances, that the central banks helped to create in the first place. The “ratchet effect,” an idea often attributed to economist Robert Higgs, states that the scope of government interventions continually ratchet up by dint of more interventions to address the unintended consequences of earlier interventions.  Regrettably, the idea is not limited to domestic fiscal and regulatory matters. The historical evidence continues to grow that the world’s central bankers, armed with their computer models and their money supply and interest rate manipulation tools, rarely succeed to achieve desired results (to their never-ending surprise) and even make matters worse by delaying recoveries and other needed domestic and global adjustments.  Rather than ratcheting up these failures with still more “coordinated” intervention that will have its own unintended consequences, it is long past time to concede that worldwide monetary central planning is fraught with human error and that what the world actually needs is a return to specie-backed sound money that resists manipulation and permits necessary global adjustments to take place undirected by monetary bureaucrats.