Brazil’s finance minister, a year ago had declared that the world had entered a phase of currency war. The global depressed economy, without enough spending going around would support economies grabbing a bit of extra demand for them by weakening their currencies. The dollar, for instance, fell by 11% against Brazil’s real in the year to August 2011, much to the dismay of the Brazil’s manufacturers. To counter the given problem, the emerging economies like Brazil had imposed taxes and other restrictions on foreign purchases of local securities. 

But these counteracting policies of the emerging nations have backfired and have now turned into a shambolic retreat. The outflows have dragged down the exchange rates of almost every emerging nation’s since the beginning of August. These economies, having spent much of the year complaining about their currencies rise, the respective central banks have now intervened in the markets to slow down their currencies plunge. In a currency war, where each side fights to gain competitiveness against the others, these falling exchange rates presumably count as victories.

The only saving grace (if any) in a global recession is on the hands of the emerging nations who have the scope to ease policy measures. Analysts at Goldman Sachs calculate that the emerging Asia could offset a growth of up to 5.1%, if they allowed their interest and exchange rates to fall to their lowest points in the crisis, and their budget balance to deteriorate as far as they did during the woeful days of 2009.

But the ‘thorn in the flesh’ is the simple fact that the emerging economies will be more reluctant to stimulate, precisely because they have done so before. India’s central bank is still coming to terms with the inflation that quickly enveloped its shores after the financial crisis subsided. The Reserve Bank of India, as recently as September 16^th, raised interest rates for the 12^th time in 18 months. Our other affluent neighboring partner, China is also preoccupied with the bad debt amassed by local governments during the stimulus lending of 2009 and 2010. The Chinese authorities are now scolding the banks for their recklessness that was urged upon them during the crisis. If the central bank decides that another stimulus package is necessary, it may find the banks as less-willing soldiers in their endeavor since even successful battles leave some casualties on the way.