Well the world is once again spinning on its proper axis. Uber-bear Ambrose Evans-Pritchard after a brief dalliance with optimism is once again viewing the world through his apocalyptic lens.

In the Telegraph.co.uk he focuses in on Japan and Switzerland. 

Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late.

“This is something that we must prevent at all costs. The current situation is extraordinarily serious,” said Philipp Hildebrand, a governor of the Swiss National Bank.

he SNB is not easily spooked. It is the world’s benchmark bank, the keeper of the monetary flame. Yet even the SNB’s hard men have thrown away the rule book, taking emergency action to force down the exchange rate of the Swiss franc.

Here lies the danger. If other countries try to export deflation by this means, we will face a second phase of the global crisis. Taiwan is already devaluing. Korea, Singapore, and Sweden all seem tempted to follow. Japan is chomping at the bit.

“We don’t fully realise in the West what a catastrophic collapse Japan has suffered,” says Albert Edwards, global strategist at Société Générale. “The West has dumped a large part of its economic downturn onto Japan by devaluing against the yen.”

This is about to go into reverse as Tokyo hits the ping-pong ball back across the net. “As the unfolding collapse in the yen gathers pace, the West will see its green shoots incinerated to dust,” he said.

It’s easy to make light of Mr. Evans-Pritchard but sometimes when I do I have the feeling that I’m maybe engaged in a little “whistling past the graveyard.”

A lot of how this unfolds is going to depend upon how the world’s politicians are able to hang together. All it is going to take is for one or two economies to have domestic politics push them towards destructive policies that bring the entire house of cards down. Witness the firestorm that the U.S. recently through over the relatively trivial issue of executive bonuses and it’s not hard to imagine issues of more import forcing leaders hands.

If Evans-Pritchard is correct and governments around the world are forced into driving their currencies lower then this begins to put the Fed in a box, doesn’t it? Simon Johnson  had a good post on why Bernanke’s expansionary monetary policy was the proper course. He bemoaned the lack of a similar effort on the part of the Europeans but argued that the Fed’s policy would force them to follow suit. Here is his logic:

The power of our big banks presents a profound economic and political problem.  Whatever happens – miraculous recovery or prolonged depression – this needs to be fixed.  But we also can’t wait around for attempts to break up the banks; the prospects for unemployment and poverty are too dire to tolerate delay.  First and foremost, we need to prevent global deflation and begin the difficult process of sustaining a recovery. 

Remember this.  If you run an expansionary fiscal policy (building bridges), I have an incentive to free ride (selling you BMWs) and not engage in a similar fiscal stimulus.  But if you run an expansionary monetary policy, your exchange rate will tend to depreciate, putting pressure on my exporters and I’ll be pushed – by BMW-type producers – towards providing a parallel monetary stimulus.

There is only one person who can talk the ECB out of its current, ruinous policy: Ben Bernanke.

But what happens if that expansionary monetary policy doesn’t result in a depreciation of the dollar? What if instead Japan, Switzerland, China etc. throw in the towel and go all in for competitive devaluations. Doesn’t that exponentially increase the ability to “free ride?”

I guess then that we should hope that Evans-Pritchard has this all wrong. Did you hear someone whistling?