Real exchange rates that are misaligned are one of the major imbalances in the world and they need to be adjusted if the developed world is to get back on a path of sustained growth, said Andrew Smithers, founder of Smithers & Co and author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers."
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Unemployed men queuing for coffee and bread at a soup kitchen run by the Bahai Fellowship at 203 East 9th Street, New York, circa 1930.
The countries that will have the most success in weakening the real value of their currencies "are likely to flourish better or at least suffer less than others," Smithers wrote.
"In this respect, as in other ways, today's world economy is a rerun of the 1930s," he wrote.
Currencies in the developed world need to devalue compared to those of emerging economies, and this can be achieved by changes in nominal exchange rates or by differences between the inflation rates of the emerging and developed world, according to Smithers.
Because rapid changes in nominal exchange rates or price levels are disruptive, the adjustment will have to come from very low inflationin the developed world, he explained.
This should be achieved by decreasing prices for services in developed economies, as the prices of internationally traded items, mostly goods, will rise as the real exchange rates of developed economies decline.
In the developed world, the US, the UK and Japan have been printing money to devalue their currencies and kick-start growth, keeping interest rates at record lows, while the European Central Bank is not allowed to print money and has already raised interest rates twice this year.
Any major currency – be it dollars, euros , sterling or yen – that can devalue against the others "will give a relative boost to that economy," Smithers wrote, adding that there was a need for internal devaluations within the euro zone.