Recently there have been rising tensions over foreign exchange policies. In a world of slower growth, many countries are competing for their fair slice of a global recovery.

No country, it seems, wants a strong currency. Brazil's finance minister, Guido Mantega, even made the comments that we are on the cusp of a "currency war" where nations try to beggar-themselves by driving the relative value of their currencies down. All sorts of various efforts are being employed to resist currency appreciation. Brazil doubled its foreign bond holders tax to four percent, the Bank of Japan intervened in the currency market by selling yen , and the US has applied intensified pressure on China to let their currency, the yuan, appreciate more rapidly.

Why devalue your currency?

The basic premise behind the debasement of one's currency is that it makes you more competitive in the global market. Basically, a lower price of your currency relative to other nations makes your goods and services cheaper and makes you more competitive and attractive in terms of exports.

In theory increasing exports will lead to a subsequent increase in jobs as companies hire to keep up with climbing sales. In a world where jobs are scarce, this is a great idea. Right?

The problem with this explanation is it's really not that simple. Foreign exchange costs do not equate one for one to the competitiveness of global products and services. There are many more factors to consider.

Take the last time the Chinese increased the value of the yuan. From 2005 to 2008 China actually let the yuan increase by about 20 percent, but retailers and numerous other manufacturing industries did NOT shift production jobs back to the US.

In fact, the trade deficit with China only rose from $202 billion in 2005 to $268 billion in 2008. The currency cannot be considered in isolation: labour costs, political stability and infrastructure are additional elements that need to factor in.

There is no guarantee that manufacturing in China, for example, will not move over to Vietnam rather than back to the US. Furthermore, countries' currencies can be viewed much like stock prices. Currencies may appreciate because the countries attract funds from abroad because they have excellent investment opportunities. The country maybe makes products that the world wants.

The world then buys more goods and services from this country which in turn actually boosts the standard of living for its inhabitants.

Under normal circumstances countries produce goods that they have a competitive advantage in. By producing these goods efficiently they are able to sell these products to the rest of the world and with the proceeds trade for other goods that other countries produce more efficiently.

When governments attempt to debase their currencies in order to gain overseas sales, they may gain some advantage in a particular industry, but the purchasing power of the countries' citizens decreases. Imported goods are more expensive for everyone.

In fact, it could be argued that despite the potential increase in jobs, overall consumption will fall as workers cannot buy as much as they used to with a weakening currency.

There is an even larger more fundamental lesson here. If politicians and central bankers think that enacting laws or policies will prevent job losses and local industries will be protected, they are simply wrong.

In a globalised world of free trade, the best people and capital will flow to where they are treated best.

If you want to revitalise an industry make your local industry competitive in terms of a more sustainable competitive advantage: high intellectual capital, superior infrastructure and/or a freer more innovative market.

As much as politicians and central banks think that they artificially alter markets, in the end the market always wins.

Markets are much bigger than any political law or central bank intervention. Long after political policies fade, the market will remain.

Nathan Kowalski is the chief financial officer at Anchor Investment Management. He holds a Chartered Financial Analyst (CFA) designation and Chartered Accountant (CA) designation. To contact Anchor, e-mail info@anchor.bm or phone 296-3515.