It’s coming up for six years since the crisis and Europe is drifting towards deflation, Japan towards recession and China towards a credit crunch. Meanwhile the Australian dollar drifts higher.
The main currency war has been between Japan and Europe, with the euro appreciating 40 per cent against the yen since the start of Abenomics in late 2012.
This is now threatening to undermine Germany’s export industries and reduce European inflation even further from the current 0.7 per cent, so that now the even the Bundesbank is talking about supporting a move towards quantitative easing by the European Central Bank.
As a result European bond yields are falling, as they are in the US and Japan as well. The expectation that yields would start rising in 2014, signalling an end to the great bond bull market, has simply not come to pass.
In Australia the long-term bond yield rose through 2013 and has stayed above 4 per cent this year, as inflation moves higher and the property market booms.
Reserve Bank governor Glenn Stevens has stopped worrying about the currency and as a result the market is now expecting the next move in the Australian cash rate to be up, possibly even this year, and for the Aussie dollar to keep rising for the time being.
So far the question of whether Australia’s housing boom would offset the slowdown in China and the drop-off in mining investment has been answered in the affirmative: the transition to non-mining sources of growth is definitely occurring.
At the same time Europe is flirting dangerously with deflation and even though the yen has depreciated massively, Japan is still struggling to get consistently positive growth. Abenomics must be redoubled.
As a result, the expectation of a widening interest rate differential is attracting carry trade money into the Australian dollar, pushing it higher, even as China slows and the iron ore price falls.
As the economy transitions from mining to non-mining, the currency is transitioning from being driven by commodity prices to the interest rate carry trade.
The key questions concern two property markets -- China’s and Australia’s. Will these two bubbles burst, as many are predicting?
If they do, then the Australian currency -- and the economy for that matter -- will suffer whiplash on the downside as its two main supports are removed.
I don’t think so. Australia’s property market is a long way from bubble territory and while China’s debt to GDP ratio is at the sort of level that usually causes problems (230 per cent), China is in a very strong position to recapitalise its banks if necessary, as the US did in 2008 and Italy and Spain did in 2012.
China’s leaders are now walking a fine line between discouraging moral hazard by letting some lenders default, while overhauling its financial system and tightening credit conditions at the same time.
It’s a tricky balancing act, and not without plenty of risks, but the Chinese Communist Party has both the cash and the control to make it happen.