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A Currency War Battle That Europe and Japan Can’t Afford To Lose

The dollar is tanking lately. From a high of around 100 in December, the dollar index — which measures USD against a basket of foreign currencies — is down about 8%, and the decline is steepening. In counterintuitive currency war terms, that means the US is winning the latest battle.

Dollar index May 16

After three years of the dollar being pretty much the only strong currency in the world, US corporate profits are falling (because it’s hard to sell things abroad when you price them in an expensive currency) and growth is slowing (because an economy can’t expand if corporate profits are falling). Presumably the plunging dollar will offer some relief on those fronts.

But our relief comes at a high, potentially-catastrophic price for Japan and Europe, because a weak dollar by definition means a strong euro and yen. And those economies are totally unprepared for their exports becoming pricier and therefore harder to move. Here’s what the yen and euro are doing while the dollar is falling:

Yen May 16

Euro May 16

Japan’s 2016 GDP growth forecast is an anemic 1.2%. The eurozone’s inflation rate is -0.2%. French unemployment is above 10%. The list goes on, but the scariest stats come from Italy where some major banks are trading at less than half of book value, implying that huge loan losses are expected.

This is clearly not the time to tighten monetary policy by raising the value of one’s currency. But that’s exactly what Japan and Europe are doing. And the sense of panic is building:

Italy, Japan urge G7 to spend for growth

(Straights Times) – Italy and Japan want the upcoming summit of Group of Seven (G7) leaders to send a “strong signal” of support for using flexible budget policies to stimulate a slowing global economy, the leaders of the two countries said on Monday (May 2).

At the start of a European tour focused on preparations for the summit, Japanese Prime Minister Shinzo Abe said he and his Italian counterpart Matteo Renzi shared a view that an acceleration of structural reforms in leading economies had to be accompanied by greater flexibility on budgetary policies.

“We agreed the G7 should send a strong signal in this sense,” Mr Abe said after talks with Mr Renzi in the Italian leader’s home city, Florence.

Mr Renzi said: “Japan is hosting the G7 at a time of great importance and I am counting a lot on Shinzo Abe’s leadership, particularly on the subject of growth.

“We have an extraordinary need to seize the opportunity presented at the G7 and we will be in the frontline supporting (Japan’s efforts) to make the summit a success.”

Mr Abe is known for his “Abenomics” attempts to stimulate economic growth through increased public spending while Mr Renzi has been the leading advocate of loosening Europe’s budgetary rules to promote recovery in Italy and other stagnating Eurozone economies.

So far, calls for massive increases in public spending — paid for with borrowed funds — have met resistance from Germany, which is happy with the status quo and terrified of inflation. But let the yen and euro have another month like the last one and the balance of power will shift from stability to growth.

And don’t forget that the above is happening during a recovery in commodities prices engineered by China borrowing another trillion dollars in Q1. Since no country on Earth can continue to borrow at such a pace without spinning totally out of control, this artificial stimulus will have to end shortly, capping commodities and maybe sending them back down to crisis levels (thus making bank balance sheets even uglier).

Two conclusions are inescapable:

1) No matter what Germany (or for that matter the US) thinks, a policy shift towards aggressive growth, fueled with deficit spending, is inevitable. The alternative is the unraveling of the eurozone and a Japanese death spiral. Once this becomes clear (perhaps via an Italian bank collapse) opposition will evaporate.

2) This will fail miserably because — in case anyone anywhere hasn’t noticed — it’s been tried on a vast scale already and all it did was double, triple, quadruple the amount of debt on the books of the various major economies. It did not produce sustainable growth for the simple reason that debt generates activity in the short run and inhibits activity in the long run. And we’re now living in that long run.

17 thoughts on "A Currency War Battle That Europe and Japan Can’t Afford To Lose"

  1. One popular prediction is that the PTB want to weaken the dollar and the US so a single new world currency and government can be ushered in. That goal may be true, but I think it would be a lot easier to strengthen the dollar enough to simply subsume all the other currencies of the world. VOILA!

  2. I believe the new gold based yuan is forcing many developed nations to restructure their cartel based policies because they have no other monetary choice left . The USD has no choice but to go down in value. The consumers of many a nations would associate themselves with the new Chinese yuan Gold based currency . That yuan could be horded and can be used as a saving to off set the negative effects of ZIRP and NIRP effect and to fight against the deflation caused against the market value of the currency concerned and nations anti saving policies . Holding gold based yuan provides many benefits – you can use it as a currency when in need with real value attached to it -it also provides a real rise in the value of the currency and one need not depend on bank deposit rates for savings which may not reflect the real value of money that do not represent good depository rates value any more and some nations currency deposits provides negative interest rates – and the new yuan gold based currency would have real precious metal value and can be used internationally as real time security for value – this would have negative effect for many for currencies like the USD and other nations that restrict gold being held – this could cause a big shift ob how currencies are going to be used in the future since the new Gold based currency is also better then hording gold itself where the benefits would be less then holding the New Gold Based Yuan currency – the nations adopting the new Gold based Yuan currency they can also reflect a better current account and trade balance balance in their balance sheets – I suppose this is why the USD is going down with no other option left and so would other nations the currencies of other nations promoting non Gold based currencies – now is the time to see how the IMF and world Banking Cartel have to say to his because the cartel are now in a fix and cant manipulate as easy as was done before – cheers and god bless .

    1. I once read about 20,000 tons looking at all sources, mining, bought and 1000 tons they claimed for the last 20 years.

      I also guess they could simply revalue it if they can get control of the bulk of the worlds supply of gold.

      I think all of this is a plan B or C maybe D.

  3. As the dollar sells off the cost of oil will increase the cost of gas. If more countries continue to sell of their treasuries we could see the end of the petrodollar and eventual hyperinflation. Bad times ahead.

  4. In the end fundamentals are going to win out and Japan and the EuroZone are the walking dead. While the Americans are hardly healthy, they are compared to these Zombies. Still if it looks like Trump will win there will be a huge dollar sell off.

    1. “In the end fundamentals are going to win out… ” Which “fundamentals” of what will win out? The price of stuff will simply reflect in the value of money. The only true fundamental will be the price of gold which will increase in proportion to the increasing worthlessness of the currency. The stock markets will not necessarily crash. Far from it, they will soar. Check out the history of Wiemar Germany in the early ’20s. Check out Zimbabwe: http://tinyurl.com/kbxvh3z. No market crash, just 3 Trillion dollar eggs.

      1. The fundamentals Bill are the Japanese death spiral, a Eurozone that is going to come apart leaving trillions of Euros of ECB bad debt paper in the hands of whom?

        The US as bad as it is, is still the only place to park assets for safety. That is why the dollar will start rising again after what may turn out to be a significant bull market correction.

        As for printing press dollars Bill, you have been reading too much Jim Willie, or someone like him. When the debt dollar does hit its end game it will be a political decision as to how much or how little of the debts to monetize.

        It could be a runaway inflation as you and Mr. Willie say, or if little is monetized then it could be a mega depression, (deflation) with people who actually have REAL US dollars, in their hands, becoming competitively rich very quickly.

        As for gold who knows? Certainly NOT the vast majority of gold bugs. When the dollar hits the fan and the entire global economy is ready to implode be assured that laws will be passed to control gold.

        If you are an American, the likelihood is that laws will be passed making it illegal to sell gold except to the government at a fixed price. The Americans will exert as much pressure as they can to close the global gold market.

        How successful Washington will be, remains to be seen, as again it will be a political issue. The likelihood is that the gold market will in some form continue between some nations and its price will be by todays standards immeasurable.

        Which people who are gold bugs today will be able to access this market again remains to be seen.

        Always remember Bill that gold is the money of kings, silver the money of merchants. barter the money of peasants and debt the money of slaves.

        When the sh*t hits the fan Bill, the kings are going to want their money. You need to ask yourself are you really one of them?

        1. Good points about individuals owning gold. I’ve thought about it a lot and the main problem I see is not confiscation or even making gold sales illegal, but in taxing the sale price and making dealers have to withhold that amount and send it in to the government similar to payroll withholding taxes. That would stink, and is the main reason I warn people to not put all of one’s savings into PMs (silver could be treated the same way if the price skyrockets.) Ideally, one can hold them until the dust settles and some new currency is developed. Handled properly, PMs should serve to store one’s wealth long term. You don’t want to have to sell them when you don’t want to though.

          1. The key Bruce is that what will be done about gold will be one of many political decisions made when the debt dollar finally crashes.

            And that no one knows what those decisions will be. Much will be determined by the global Geo Political and economic environment that exists at the time of the crash, as well as the amount of internal population control that Washington has or doesn’t have.

            So predicting how it will play out is IMHO a fruitless exercise at best and and a dangerous speculation if you are wrong. The key as always is to have as much of a balanced portfolio as possible.

            The greatest challenge is less creating such a portfolio, than knowing which assets governments are likely to try and manipulate.

          2. A balanced/diversified portfolio for sure, but when it comes to gold/silver they are largely independent of government/fiat valuations. If/when the SHTF government/fiat goes out the window monetarily and survival modes step up. People then decide how they want to contract and exchange.

            But my comment was directed more to a period of time when everything is still intact – more or less – but there may be hyper inflation and/or shortages going on. If one needed to exchange PMs for fiat currency then they may be subjected to whatever draconian rules the PTB invent.

            In any case, I think we both agree that PMs should be a part of every balanced and diversified portfolio.

          3. All good points on our choices. I live in New Zealand where we actually produce consumable, necessary “stuff”: lamb, beef, wool, milk,fish, wine, etc. How do you gentlemen value stores of wealth going forward which are non-conterparty risk, physical AND actually create wealth the old fashioned way? i.e labour and quality farmland? thank you

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