The Global Currency War

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   Brazilian Finance Minister Guido Mantega spilled the beans on Monday when he committed the cardinal sin of telling the truth.

 “We’re in the midst of an international currency war,” Mr. Mantega said. “This threatens us because it takes away our competitiveness.”

  “The advanced countries are seeking to devalue their currencies,” he said, mentioning the United States, Europe and Japan in the context of what he portrayed as an intensifying trade competition.

 All over the world nations are in a race to the bottom with their currencies. The objective is to gain trade advantage over competitors. In other words this is a global trade war, one that is being done by destroying people’s savings.

  In all, about 2/3rd of the global economy is in the process of debasing their currencies. Nothing has happened like this since the 1930s.

 It’s a return to global beggar thy neighbor economic policy that proved so hopelessly flawed in the Great Depression.

  Mantega has very little room to speak badly of others. He has been extremely active in trying to force down the value of his currency.

 Banco Central do Brasil bought $5.9 billion in the first 12 days of September, the most in 11 months, according to Altamir Lopes, head of the bank’s economic department.

 To make it doubly troubling, Brazil is actually selling bonds (as opposed to simply printing local currency) in order to finance the buying of dollars. Thus making it a leveraged bet.

  Brazil’s currency is rising not because of speculation, but because of market fundamentals.  This is what is supposed to happen when you have a strong trade and current account surplus.

 Brazil is not alone. Colombia has said that it will $20 million daily for four months after its currency rose 13% against the dollar. This was shortly after Peru’s currency intervention. Even Mexico is looking to cheapen its currency.

 Latin America is simply following down the path that east Asia has tread for decades.

Japan, one of the world’s richest nations with one of the largest trade surpluses, dropped $12 Billion on the currency markets in a single day. It is the first time they have intervened in the currency markets since 2004, when they purchased hundreds of billions of dollars of U.S. Treasuries in an attempt to devalue their own currency.

  This came just days after it was revealed that China was buying Yen, forcing up the value of the Yen. Normally large trade partners wouldn’t mind cross-border investment, but not these days. It angered the Japanese.

  South Korea, like most of the rest of Asia, is also guilty of holding down their currency despite strong trade and current account surpluses.

 The biggest headlines was the House Ways and Means Committee passing a bill that would declare China a currency manipulator.

 The House Ways and Means Committee today passed a measure that would declare currency manipulation — like China’s habitual efforts to keep the yuan from rising against the dollar — a trade subsidy open to retaliation that includes tariffs on Chinese imports.

 It’s much like closing the gate after the horse has long since left the county, but it adds to the tension.

 European nations have also participated in this race to the bottom. Switzerland has now spent 1/3 of their GDP trying to devalue their currency and accomplished very little.

Someone has to win; someone has to lose

 So if everyone is doing it then what is accomplished? After all, the currencies have to devalue against something, right?

 The obvious early winner in this race to global debasement is gold.

   We have a new world order where China and India are buying gold on every dip, where the West faces an ageing crisis, and where the sovereign states of the US, Japan, and most of Western Europe have public debt trajectories near or beyond the point of no return.

  The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed never to do just months ago; and the Bank of Japan has just carried out two trillion yen of “unsterilized” intervention.

 Of course, gold can go higher.

 Investors all over the world are seeing their governments and central banks printing money in ever increasing amounts in order to fight the global deflation caused by the collapse of real estate prices in much of the world (and overproduction of consumer goods from Asia). With the coordinated efforts of cheapening the cash in their hands, investors look for safe havens such as gold.

  Normally real estate would be a benefactor of the monetary inflation, but that card has already been played.

 The game of currency debasement has very few winners. It has lots of losers.

The list of losers include anyone who eats food.

 United Nations experts are describing volatile food prices as a major threat to food security. At a special meeting of the U.N. Food and Agriculture Organization in Rome Friday, they concluded that a repeat of the 2007-2008 food price crisis is not imminent, but new measures are needed to control fluctuations in grain markets.

 Food inflation is running at over 15% in countries such as India. Australia expects prices to rise 50% in the next ten years. Global food prices have hit their highest levels since September 2008. The problem is that commodity price hikes are accelerating as the global currency war kicks into high gear.

 Sugar, up more than 50% in only three months. Cotton, up more than 40% since July 20.

Soybeans, up more than 20% since the beginning of June. Oats, up more than 60%. Corn, jumping more than 48% just since the beginning of July!

Palladium up 20% since early June. Copper up 26%.

The Fed’s money-printing and dollar devaluation is the chief reason we’re seeing these massive price gains in natural resources, tangible assets.

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  The global rise in prices have already triggered food riots in Mozambique that left six people dead when police shot into protesters.

 A few pennies’ increase in the price of a loaf of bread can mean the difference between getting by and going hungry – and erupting in anger – in the world’s poorest countries.

  “I think everyone is wondering if we are going to have a repeat of 2008 when … there were food riots around the world,” said Johanna Nesseth Tuttle, director of the Global Food Security Project at the Center for Strategic and International Studies in Washington.

 

  Some are pointing the finger at Russia. The recent rash of wildfires destroyed much of wheat production, so it banned all grain exports.

   For some reason, few have drawn a connection between the global currency wars and the global rise in the price of food. I find that disconnect rather strange since it seems so obvious. For instance, if you look further down in the article about the Mozambique food riots you will see this paragraph:

 In Mozambique’s case, he said, higher prices set by the government were based on monetary exchange issues, not concerns about world supplies.

  Mozambicans saw the price of a loaf of bread rise 25 percent in the past year – from about four to five U.S. cents, and fuel and water costs also have risen.

 

 Let’s walk this idea back:

1) Governments and central banks in the first world decide that the inflation rate isn’t high enough, and in an effort to protect inflated asset values with bailouts,

2) they roll out programs to expand the monetary supply by buying overpriced debt instruments, which has the effect of cheapening the currency.

3) Nations all over the world then print money, or even borrow it, in order to purchase dollars to cheapen their own currencies and maintain their export markets.

4) All that money has to go somewhere, and since the housing bubble is no longer a choice, it goes into other hard assets such as food. The financial media blames speculators.

5) The price of food rises until the poorest begin to starve.

The End Game

 Newton’s Third Law of Motion is often stated as “To every action there is an equal and opposite reaction.”

 Milton Friedman’s took this idea into economics when he said, “There ain’t such thing as a free lunch.”

 I’m no fan of Milton Friedman, but in this case he is right. We can’t expect to keep bailing out banks and governments by printing massive amounts of currency without the effects bleeding into unintended sectors of the economy. Anyone who thinks otherwise is delusional.

  Printing money is a zero-sum game. The first to access the new money benefit. The ones who access it last are the losers. If we keep continuing down this road of global bailout after bailout, and higher and higher global deficit spending, we are going to see these unintended effects getting magnified until they become a feedback loop that will ultimately lead to social, economic and political instability.

  There is no moral or economic justification for why the global banking system must survive at the expense of the poorest of the world.

  The time has come for the grownups to take charge and for the children to sit down and shut up. Unfortunately, I’ve not seen any grownups around.

15 comments

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    • gjohnsit on September 28, 2010 at 11:45 am
      Author

    We’re going to need it.

  1. I heard this initially forecast when the crisis hit in 2008.

    Does this explain Bernake’s continued QE plan to buy more U.S. Treasuries?

    • Xanthe on September 28, 2010 at 1:41 pm

    well read to survive today.  I can’t keep up, though I admit I’ve had no training whatsoever in economics save a baby class.  Yet, look here – it affects how I run a house.

    In simple terms (for this dummy) is the “moral or economic justification for why the global banking system must survive…. “that the ubermen are just playing high stakes poker and they leave the table as soon as the money is made?  This is “free trade?”

    Is water next?

    Since we are so connected in trade – shouldn’t we have a global currency board?  I know the UN has no power, but do they at least offer position papers here.

    I’m seeking enlightenment – perhaps I should join a buddhist sect.

    • Edger on September 28, 2010 at 2:45 pm

    on manufacturing outsourcing to China by US companies?

  2. Good thing Dublin doesn’t have the hot summers that Moscow has. Food and Water, the next great booties and weapons of war. Oh wait, it slipped my mind, just a return to the bronze age with a twist of lemon, except with a world population that the conquistadors would have salivated over.  

  3. Here’s an example of the effects of an attempt to create US jobs by imposing heavy duties on a product from China (automobile tires).

       

    (John) Frisbie glumly pointed out that a hefty US countervailing duty on Chinese automobile tires had, instead of yielding a bonanza for American employment, simply redirected imports away from China to other overseas suppliers:

          … imports from China are down 26%; imports from Japan, South Korea, Taiwan, Indonesia, Thailand and Mexico have more than filled the void and imports of low-end tires overall are 21% higher than before the tariffs.

       On the theoretical level, the idea that exchange rate adjustments are a panacea for national trade and investment problems has been rebutted by Ronald MacKinnon of Stanford University.

          Unfortunately, what lies behind this unnecessary political crisis is a widely held but false economic belief: the idea that the exchange rate can be used to control any country’s trade balance, which is the difference between its saving and investment rate. Instead, the problem is a saving deficiency in the US – with very large fiscal deficits and low personal saving – coupled with surplus saving in China.

       Asia Times – http://www.atimes.com/atimes/C

    We have to be able to compete. For various reasons we, the US, has lost out in recent years/decades. Blame China, they are a convenient and popular target, but the real reasons lie elsewhere.

    We will have to make some unpleasant adjustments or continue to slide. Globalization, or whatever one wants to call opening the world to trade and market competition, is having an equalizing effect. There are winners and losers. Those who have been winning for decades will lose some advantage to those whose past purpose was to provide cheap resources for the wealthy nations. Those days are coming to an end.

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