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Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Lately there’s been a lot of talk regarding currency wars. Let’s take a look at why competitive currency devaluations – currency wars – won’t accomplish what’s intended and why we’re going to have to see increasing U.S. protectionism (subsidies, tariffs etc.) regarding global trade.
Currency War - when countries around the world start competing (competitive devaluation) to make their currency cheaper than everyone else’s as a way to boost trade.
So how do currency wars get started? From Wikipedia comes the following:
“Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets. However, the price increase for imports can harm citizens' purchasing power. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.”
The currency war is going global, joining the currency depreciation race, or at least considering joining are the Euro-zone, Norway, Sweden, South Korea, Taiwan, Columbia, Mexico, Peru, Chile, Venezuela Luxembourg, Switzerland, Brazil and many other regions.
Winners and Loser
“It seems everyone wants to enact budget reform while simultaneously expanding economically. What's wrong with that? Well, the way most G-20 economies plan to expand is through export growth, a strategy that looks to harness foreign demand for goods and services rather than relying on domestic consumption. However, if overall world GDP growth is anemic or stagnant, the only way to achieve export-led growth is at the expense of someone else. In economics, this is often referred to as "beggar-thy-neighbor" policy, and it is a page straight out of the Great Depression's text book.
Beggar-Thy-Neighbor is an expression in economics describing a set of policies that seek to benefit one country at the direct expense of others. In particular, beggar-thy-neighbor policies typically pertain to an international trade policy of competitive devaluation and increased protective barriers instituted at the expense of trading partners. In its most simplistic form, "beggar-thy-neighbor" describes any economic policy that seeks benefits for one country at the direct expense of another. In practice, it generally pertains to the process of competitive devaluation whereby a country depreciates its currency in the hope of increasing exports.” Scott Minerd, The Return of “Beggar-Thy-Neighbor”, Guggenheim
Despite a massive all out effort to make the U.S. dollar worth less, its exports cost less and increase the number of jobs over the last decade, the U.S. is losing the currency devaluation race:
The goods trade deficit with the EU shot up 16 percent to $116 billion in 2012.
The goods trade deficit with Italy is $20 billion, Ireland $25 billion, with Germany $60 billion.
The U.S. goods trade deficit with South Korea soared 25 percent to $16.6 billion last year.
Japan had a $76 billion goods trade surplus with the United States in 2012. Expect it to increase, the Bank of Japan has driven down the yen 20 percent against the dollar over the last three months in an effort to increase exports to America and cut American imports into the country - the U.S. trade deficit with Japan is going to explode.
China will, in response to Japans deliberate yen depreciation, allow its currency the yuan to depreciate forcing all other Asian countries to do the same to keep their exports competitive with China’s and Japan’s.
Last year, the United States ran a goods trade deficit of $32 billion with Canada and $61 billion with Mexico.