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Competitive Devaluation, Stage One: Friends Bickering

by John Rubino on November 9, 2010 · 17 comments

This is what the early stage of a currency war looks like:

Japan’s Leader Bemoans Impact of U.S. Economic Policy

TOKYO—Prime Minister Naoto Kan joined the growing chorus of world leaders complaining about the side effects of American economic policy, tying the Japanese yen’s strength to Washington’s aggressive stimulus efforts—and implying that the U.S. should be accepting of Japan’s own controversial moves to halt the yen’s rise.

“First and foremost, one of the biggest reasons for the yen’s rise is the dollar’s weakness, a reflection of America’s economic policy. We need for there to be a clear understanding of that background,” he said in an interview with The Wall Street Journal Saturday. He added: “President Obama has said the U.S. wanted to shift its economy from one driven by consumption to one that relies more on expansion of exports. We do recognize that basic policy. But there are reverberations of that policy on Japan.”

While many nations have seen their currencies appreciate recently against the U.S. dollar, Mr. Kan stressed that Japan’s weak economic growth makes its ability to cope very different from that experienced by emerging markets where growth is strong and exports are rising steadily. “In that sense, we would really like the U.S. to understand the situation we are facing,” he said.

Mr. Kan also made clear that Japan reserves the right to intervene in currency markets again. Rapid one-way movements in exchange rates are problematic, he said, saying that was why Japan felt compelled to intervene in September. “If we face another rapid surge in the yen, such a step may become necessary,” he said.

The U.S. dollar has fallen almost 13% against the yen so far this year. A stronger currency pinches Japan’s exporters because it makes their products more expensive abroad and pinches profit margins.

Germany Criticizes Fed Move

Finance Minister Says Policy ‘Doesn’t Add Up,’ Sees U.S. Model in ‘Deep Crisis’

BERLIN—German officials, concerned that Washington could be pushing the global economy into a downward spiral, have launched an unusually open critique of U.S. economic policy and vowed to make their frustration known at this week’s Group of 20 summit.

Leading the attack is Finance Minister Wolfgang Schäuble, who said the U.S. Federal Reserve’s decision last week to pump an additional $600 billion into government securities won’t help the U.S. economy or its global partners.

The Fed’s decisions are “undermining the credibility of U.S. financial policy,” Mr. Schäuble said in an interview with Der Spiegel magazine published over the weekend, referring to the Fed’s move, known as “quantitative easing” and designed to spur demand and keep interest rates low. “It doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar.”

At an economics conference in Berlin Friday, Mr. Schäuble said the Fed’s action shows U.S. policy makers are “at a loss about what to do.”

Mr. Schäuble hit back at critics in the Der Spiegel interview. “Germany’s exporting success is based on the increased competitiveness of our companies, not on some sort of currency sleight-of-hand. The American growth model, by comparison, is stuck in a deep crisis,” he said. “The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base. There are many reasons for America’s problems—German export surpluses aren’t one of them.”

Obama Jumps into G20 Spat

NEW DELHI—U.S. President Barack Obama, returning fire in a heated exchange with Germany, added his voice to U.S. efforts to reduce massive German and Chinese trade surpluses and increase pressure on China to let the value of its currency rise.

Tensions have flared between German and U.S. economic officials ahead of the summit of the Group of 20 industrial and developing nations, which begins Wednesday night in Seoul. U.S. Treasury Secretary Timothy Geithner has been pressing member nations to adopt targets to lower trade surpluses and trade deficits. In return, German officials have publicly lectured Washington about the wisdom of its economic policies.

In a joint news conference with Indian Prime Minister Manmohan Singh here, the U.S. president came close to defending the U.S. Federal Reserve’s decision to pump $600 billion into the economy by buying U.S. Treasury bonds in a bid to keep interest rates low and spur consumer demand. The Federal Reserve is independent of the administration, and by tradition the White House has strained to avoid any appearance of collusion on Fed and administration policies.

Mr. Obama said the administration doesn’t comment on particular actions of the U.S. central bank, then said, “I will say that the Fed’s mandate, my mandate, is to grow our economy. And that’s not just good for the United States, that’s good for the world as a whole.”

The G-20 summit is shaping up as a showdown between the exporting powers and nations like the U.S. that are struggling to emerge from recession and high unemployment by tapping export markets. Mr. Geithner, facing continuing resistance from China on the currency issue, has shifted his focus to trade surpluses, which can be exacerbated by artificially low currency values as well as other policies. That was meant to lift some of the pressure from China and spread it to other nations, especially Germany.

At this point, everyone is still basically friends. They’re annoyed with each other and worried about the next election, but fully expect to get past this spat and resume more-or-less amicable cooperation/competition in the not too distant future.

But no one has any idea how to get from here to there. The US consumption/debt driven model is an obvious failure, and the export-driven models of Germany, Japan and China are unsustainable because they depend on their trading partners going deeply into debt, which the surplus countries then have to subsidize. In business this is known as vendor financing (lending a customer the money to buy your stuff), and it works only as long as the customer can continue to pay its bills. Frequently, the practice just ends up stealing from future sales and saddling the lender with big write-offs.

So things will get much uglier when the surplus countries 1) see their exports plunge because their strong currencies have priced them out of global markets or 2) try to use their dollars to buy US assets and are blocked by the US on national security or political grounds.

Then the real competitive devaluations begin. Pure, panic-driven self interest will dominate international relations. Former friends will use their exchange rates as weapons, producing chaotic, non-linear  markets and — if history is a guide — some real (as opposed to currency) wars.

The end result, if we’re lucky, will be the realization that politicians can’t be trusted with printing presses.

  • Tim

    The only thing I strongly disagree with is your conclusion: “The end result, if we’re lucky, will be the realization that politicans can’t be trusted with printing presses”. Why? The Federal Reserve is a cartel of banks, it is not run by politicans – it is run by private for profit banks. For some reason, half the articles here acknowledge that the Fed is not a government institution and not run by the government, then all of a sudden it is conflated. The reality is that corporations that are for profit cannot be trusted with a printing press either. They only care about saving their own butt, but the good of the nation is not at all a consideration. Please let’s be accurate about who has the printing press and who doesn’t.

    • Rich

      Tim, Tim, Tim,
      Banking and politics are highly intertwined. Do you think Prime Minister Naoto Kan, Wolfgang Schäuble (German Politician), Obama et al. are constantly making comments about the currency wars to fool people like John Rubino into thinking they have a say in the matter?
      The mere creation of central banks was by government edict (voted on by their legislative bodies and signed into law by their supreme leaders).
      The current banking system is not at all a product of unintervened (politically) free markets. Yes, the banks have bought off large chunks of the system, but in the end the buck starts and stops with the government (the enforcement arm of the current system). There is no end to the number of special interest groups (including banks of course) that take advantage of the government’s power. If it’s there for the taking, someone is going to snatch it. It would be far easier to get rid of the scummy politicians’ ability to hand out money and power than condemn everyone that tries to use it as a tool to impose their will on others. And I’m talking about big banks all the way down to the majority of individuals in this country that use government to ban smoking.

  • nobodyatall

    Let us also be clear about man and his inability to govern himself. History has proven beyound any dout that humans should never have been created in the first place. The first man was given the simple task of watching and caring for the animal kingdom. The score card has shown a resounding failure in even this. Greed seems to spawn apathy which in time turns a clean heart black. I tell you this, that very soon there shall be dead bodys pilled in the streets from the coming starvation this greed and lust for money and power have born. I sleep not.

  • corcern

    US must maintain its stand on low currency for the US$ for the country to get out of the debt situation. The US$ had been artificially maintained at a high level so that Asian countries could export to US and artificially create a low inflation situation for the financiall industries to thrive at the detriment of the nation. This has gone on for too long and the public had been misled by the powerful financial industry.

  • Zeke

    I don’t think exporting countries depend on consuming countries to be in debt. I think that is pure BS. They just depend on exporting. If importing countries decide to be deeply in debt, that is their choice. Let’s stop blaming others for our unsustainable finances. I’ll know we’re on the right track when we stand up, like adults, and take responsibility for our own insanity. It is most unfortunate we continue to blame others. The US has manipulated it’s own currency, as it is doing now, to the detriment of others from our very beginnings. Every day, I read or see information that is, obviously, geared towards it’s own promotion by feeding into the anger/resentment of arrogant, spendthrift Americans.

  • PeteCA

    It would be helpful if someone explained to our President that expanding the money supply is not guaranteed to “grow the economy”.

    John Rubino – what you are seeing really is the beginning stages of the breakdown of the G20 banking cartel. The Asian banks are already consorting amongst themselves about ways to protect against an onslaught of “hot money” and rapid inflation. The ECB has turned a cold shoulder towards the Fed – and some ECB members have been quite outspoken and forceful about it. The BOE has apparently decided to not follow in the Fed’s footsteps also. We are seeing the end of global cooperation in banking policies, and the start of a complete re-alignment of the centers of financial power. This is actually an historic time.

  • http://chaosandconspiracy.wordpress.com CompassionateFascist

    “Historic times..”. Agree with that. Fed/Banksters current monetization of the stock market is endgame; look at the curves for gold,silver: approaching asymptotic. Paperhats fought back by raising margin requirements, to no great effect. They are doomed.

  • Dave Ziffer

    It is nice to see the heads of foreign governments finally openly condemning U.S. policy and in some cases even predicting our downfall. Until recently, the only people who’ve been making these sorts of noises have been people like us posting on sites like these, who the rest of the U.S. population (if they know about us at all) regard as doomsayers and fruitcakes.

    I have had to stop talking to friends and family about this finance stuff (warning them that they’d better get their assets out of the dollar ASAP for example) entirely. They just don’t want to hear about it. Everyone’s head is firmly in the sand. So .. all this is not going to help my friends and family any, but it’s a pleasant little consolation for me anyway.

  • Kevin

    you should see war before end of year and a peace treaty in israel. thats fullfillment of daniel 9:26-27

    1947-2017 70 weeks = years Daniel 9:24
    1948-2010 62 weeks = years Daniel 9:25

    2010-2017 7 yr peace treaty in israel over land. Daniel 9:27 1 week is this period also refereed in Daniel 9:25 as the 7 week period which is the tribulation period before Messiah comes

    2010-2011 Matthew 24:6 , revelation 6:1-2 wars and rumors of wars
    2011-2012 Matthew 24:7 ,revelation 6:3-4 civil wars
    2012-2013 Matthew 24:7, revelation 6:5-6 famines
    2013-2014 Matthew 24:15,21 revelation 6:7-8 ,revelation 12:7-12 , daniel 9:27 middle of tribulation Jesus says to His disciples to go back to daniel to figure it out whats going on.

    • edward

      If it doesn’t happen, will you give up your inane belief? Of course not. You’ll just assume that you miscalculated. Like every other “prophet” before you.

  • Bruce C.

    The fundamental problem is that the US is in an impossible situation and every politically possible thing is being tried to extend the appearance of the status quo and hope against hope that somehow, some way things improve. For those who think they know better the policies are meant to – hopefully – lessen the repercussions.

    Since fiscal and regulatory policy changes seem doomed to gridlock, only monetary policy remains to stimulate the economy. Unfortunately, monetary policy has few options and buying Treasuries to lower long-term interest rates is the main one. The problem that policy makers are just beginning to face are the unfunded and unfundable liabilities – the federal (and state) deficits. Devaluation of the dollar by creating more of them is the only hope of meeting those obligations, short of outright default. In the meantime, the US is literally asking the rest of the world to sacrifice so that the US can recover by increasing its exports and decreasing its imports from those very countries. I doubt that they will do it, but I’m not sure. If they don’t, and protect their markets, and the US does implode then the world will be in uncharted territory not seen since the proverbial year 464 (when Rome “fell”). Then again, they may take their chances, because if the US is let off the hook now there is every reason to think the status quo will remain, despite a few Tea Party candidates getting elected (who, by the way, say they have no intention of reducing SS or Medicare). Until there is some demonstrable action to reduce spending I doubt any country will believe the US is serious, and the current patience and measured criticisms will probably get ugly soon. It’s a mess.

  • Whitecoat

    The US may collapse, and the rest of the World could continue to function. A new currency, or hybrid, such as a Euro/Yuan might be adopted, and the remaining players would gradually find markets for their goods, albeit at markedly reduced values. Perhaps this is both a good thing and inevitable, as crushing levels of debt and unsustainable standards of living revert to historical norms. A victim of it’s own excesses, America would be placed on the injured reserve list, forced to slowly recover at it’s own pace and later rejoin the world economy as a leaner and wiser nation.

  • Historicus

    Competitive currency devaluations, to be followed by protectionist tariffs, and its back to the 30’s. I thought long ago that the dollar, the yen, the mark, etc., would all come to equal one another: 1$ = 1Y = 1L. I was mistaken.

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  • http://www.thesingleshop.com/blogs/posts/xiaosi134 asics tiger

    very nice article, i certainly like this website, continue on it.

  • http://www.manhattancalumet.com james moylan

    I have a web site where I research penny stocks and stocks under ten dollars. I would like to comment. what about this scenario the living standards drop by half in the united states because of inflation than all the manufacting jobs come back here because its now cheaper to produce many things in the united states instead of china or elseware.

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