Saturday, September 10, 2011

Welcome To The Currency Wars
The central banks of the US, Europe, Switzerland, Japan, Brazil and China (via their peg to the USD) are all actively suppressing or cutting their interest rates, buying their own sovereign debt or actively intervening in their currency markets.  These are all very different activities with different costs and benefits but the one thing that they all accomplish is an increase in fiat currencies.  As one bank prints or otherwise weakens their own currency, by definition they strengthen someone else’s.  This causes the exporters in the stronger currency to lose earnings and growth.  Which causes them to try to weaken their currency and by definition, strengthen someone else’s.  In the current economic environment where the US is the dumping ground for the rest of the world’s excess supply, this only works so long as we are increasing our own debt levels.  But our debt threshold as a people, economy and government has been reached, breached actually.  Which means we are now forced to devalue our own currency to maintain our mountain of debt, by definition strengthening the rest of the world’s currencies.  Unfortunately, this means we’re trying to increase our own exports at exactly the same time every country is trying to do the same thing.  So we devalue to make our exports cheaper.  And then they devalue to make their exports cheaper.  And then we devalue again.  And then they devalue.  Rinse, wash, repeat.

In my opinion, the Swiss and Brazilian moves signaled the true beginning of the global currency wars.  The depreciation race to the bottom has begun.  Trade wars will be next.  This is just getting started.  Once FX interventions fail, governments suffering from falling exports will attempt to protect local champions via protective taxes, tariffs and the limiting of certain imports.  Affected governments and industries will retaliate for their own loss of exports and so on and so forth.  Welcome to the currency wars.

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