The Reserve Bank of India again intervened against the dollar last night, bringing the rupee off its historic low. The intervention, however, was dissimilar from previous moves as it took the form of restricting flow. According to The Hindu, the RBI took to, “ordering state-owned oil companies to purchase their dollar requirement from a single public sector bank for every daily transaction to curb volatility in the currency.”

Weak currencies have moved out of the shadows in policy circles and onto the front burner of concerns. Getting closer to the next G-20 meeting in Moscow, Japanese officials leaked one of the primary topics on the agenda:

“The issue is no longer competitive devaluation of exchange rates,” one of the Japanese government officials said. “Emerging nations are in trouble as their currencies have become too weak.”

It’s almost as if these countries want a stable exchange mechanism, decrying currencies that are too strong and then wailing about their turnaround weakness. If they could stop and separate themselves from their ideology on economics, they might see that QE’s and “competitive devaluations” are not panacea’s or even marginal solutions, they are inherently destabilizing toward global finance and economic efficiency and efficacy. “Hot money” is not a problem in a stable or nearly stable system. Imbalances never get so far out of proportion where currency regimes are not “managed” by central banks.

Complex systems tend to experience an increase in volatility as the critical state advances toward the inevitable phase shift. Five years after the first rumblings of financial strain, policymakers still struggle to find the right policy – gyrating between various and often contradictory “solutions” (Brazil wanted a weak currency; now they don’t). Never do they see that the flaws are inherent in the very system that places so much emphasis on “policy” in the first place.

 

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