Posted on 10/15/2010 4:27:50 AM PDT by blam
Global Currency Meltdown
Currencies / Fiat Currency
Oct 15, 2010 - 03:41 AM
By: Peter Schiff
As the recession and resultant stimulus packages add to higher unemployment and increasing public-sector deficits, the government is seeking to boost the value of overseas earnings that are accrued by US corporations. To aid in this effort, the Fed is being pressured to erode the value of the US dollar, thereby making foreign sales more lucrative in nominal terms. But this form of stealth protectionism will fail just as surely as more overt trade barriers.
Like all commodities, the relative value of currencies is influenced by reward, risk, and future expectations.
The interest rate earned by holding a particular currency represents the 'reward' end of the equation. Assuming similar risk profiles, money tends to flow towards the currencies with higher interest rates.
Relative risk is in the eye of the beholder and often is difficult to quantify. In the main, investors view a nation's balance of payments deficit as a major risk factor in evaluating the relative value of its currency.
Another long-term measure of risk is government debt as a percentage of Gross Domestic Product (GDP). If a large national trade deficit is accompanied by a relatively large debt-to-GDP ratio, the level of risk is increased.
Given the current state of the global economy, it should be clear to all that the US dollar is being priced higher than is warranted and the Chinese yuan is priced lower.
For over a decade, China has exported into an American market that was open and receptive to cheap products. In response to the demand for these new products, the Chinese yuan should have risen sharply against the US dollar to balance the massive Chinese trade surpluses.
However, the Chinese have pegged the yuan to the dollar, preventing a natural rebalancing of the two currencies from taking place. Not only has this generated a politically dangerous and economically unsound trade imbalance, but it has made the dollar appear stronger than it should, given the frail state of the American economy.
Left alone, internal pressures and common sense would have driven the Chinese government to eliminate the peg. To understand why, consider this: even if China didn't accept one more dollar, any attempt to spend its massive reserves would cause the dollar to drop like a stone. How long should we expect them to keep digging themselves into this hole?
Unfortunately and quite predictably, Washington isn't allowing the market to naturally correct. Instead, the Fed is attempting to devalue the currency by the printing press. Now we can expect not only the deluge of foreign exchange reserves to flood our economy, but also additional dollar tsunamis emanating from our own central bank. This makes a tragic situation worse, and risks instigating a full-blown trade war between the world's largest consumer and its largest producer.
Meanwhile, other countries whose economies are heavily dependent on trade, such as Japan, Switzerland, and South Korea, are finding their exports hit hard by the simultaneous devaluations of the US dollar and the Chinese yuan.
On October 2nd, the Financial Times (FT) headline was: "France Pushes for Currency Accord". It was reported that even China was supportive of the French initiative. Then, on October 5th, the FT headline was: "Call for Global Currencies Agreement". This time the call was from a group of some 420 of the world's leading bankers. Finally, on October 6th, the FT headline was: "IMF Chief Warns on Exchange Rate Wars". Clearly, certain government leaders and bankers are aware of the risks of competitive currency devaluations. The question is whether parliamentary politicians will support currency stability in the face of increasing recession. The two most influential central banks - the Fed and People's Bank of China - certainly aren't setting a good example for the rest.
Only when currencies are allowed to float freely will trade imbalances be corrected. Washington's attempt to force the issue is only doing harm to the world economy by introducing uncertainty and punishing the prudent. The Fed has gone radioactive, setting off a global currency meltdown. Perhaps only gold can truly shield investors from the fallout.
Instead of win-win, it's lose-lose, according to Schiff.
No matter how HORRIFYINGLY PAINFULLY TRAGICALLY AWFUL it really is, it is a MILLION times worse. Then things get *really* tough. After that, HORRIBLE things happen, and then we REALLY get screwed. Immediately following that, the BOTTOM drops out and we are all DEAD, and THEN things get HARD! Once that happens, it signifies the TOTAL collapse of EVERYTHING, and that’s when the CATASTROPHE starts! Then there will be an OMINOUS PAUSE which CANNOT SAVE US because it’s DOOM BABY. We’ll slide right into complete DOOM and HORROR and BAD THINGS; Thereafter, it’s the sign of the end of EVERYTHING, but after that, comes the TRAGEDY and GLOOM and DARKNESS. Then times get DIFFICULT, and things get WORSE, until it’s EXCRUCIATING, but that’s just the beginning, because after that it’s all PAIN.
Sounds like Schiff is calling out the shenannigans of the the Liberal Free Trade Globalists.....Reverse Protectionism...which is really nothing more than failed Liberal Free Trade Globalism.
Globalists have to manipulate currency because Free Trade does not work. Why do you think the Communist Chinese have been altering their currency....
Vincent Fernando, CFA
Oct. 15, 2010, 6:19 AM
A race to competitively devalue currencies even further would lead to global crisis, says European central banker Juergen Stark.
Yet this crisis has nothing to do with hyperinflation or trashing the value of currencies, as many believe is the inevitable crisis.
It's that competitive devaluations would lead to the erection of defensive trade barriers, which would cause economic activity to contract as they have in the past.
"It would be fatal to enter a race to devalue, which in the end will bring about protectionism. Protectionism in the 1930s is what led to the global economic crisis," he said to the German business paper Handelsblatt according CNBC.
It seems any crisis would thus be one of protectionism, not a currency crisis.
We probably wouldn't even get far enough in the competitive devaluation process to hit a true currency crisis, since new trade barriers would quickly make devaluing one's currency useless as an export strategy.
[snip]
After that it's all downhill.
“If the fiat currencies of the world go Poof then the vast majority of the worlds wealth vanishes with them. “
That reminds me, I’ve got to go buy a two bottom plow for my tractor.
So what’s your take on the economic situation, that the dollar is actually very strong, the economic future looks bright, and this is merely just another slow period in the economy? What would you base that on, the DJIA being at 11K?
Then it is really much better than I thought.
Thanks, Laz. I feel a whole lot more optimistic about EVERYTHING. ;)
He’s just having some fun.
The dollar is indeed doomed, and non-Government pensions will become worthless or be seized by the Government - but there’s still time to get into hard assets.
And one day Bambi won’t be King anymore.
(Requires specialized hardware, sold separately)
“It would be fatal to enter a race to devalue, which in the end will bring about protectionism. Protectionism in the 1930s is what led to the global economic crisis,” he said to the German business paper Handelsblatt according CNBC.
What Liberal Globalist horse crap. Its that “Smoot Hawley caused the Great Depression” nonsense again.
Liberal Globalist trade policies is why we are here now....Protectionism is the only thing that will work to correct the problems...especially when the US enacts protectionism.
The failure of Liberal Globalist Free Trade is the reason the world economy has collapsed
Gee. Laz. That sounds like a buying opportunity...
No, free trade works fine. Manipulating currency is NOT free trade. Schiff is pointing out that it doesn't work, that allowing a free trade in currency is the solution.
Protectionism did cause the Great Depression. Its not crap, it’s what happened.
Socialists believe that tariffs create wealth, in the same way that taxes create wealth.
But they don’t. Tariffs destroy wealth. They are a tax on buyer and seller, and a subsidy for uncompetitive domestic “industries”.
In your Brave New World, we’d all have to buy a GM car off heavily-compensated union goons rather than (horror!) be allowed to buy cars that are cheap and effective from foreigners.
Edited for clarity
Protectionism did not cause the Great Depression. According to Friedman it was caused by the Fed. Protectionism just made it worse.
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