Recent news about Federal plans to "help" manage private retirement accounts renewed our interest in the topic of capital controls. One example of capital control is to limit the amount of money that can be transferred out of the country; another is limiting the amount of cash that can be withdrawn from accounts; a third is the government mandates private capital must be invested in government bonds. Though presented as "helping" households, the real purpose of the power grab would be to enable the Federal government to borrow the nation's retirement accounts at near-zero rates of return. As things fall apart, Central States pursue all sorts of politically expedient measures to protect the State's power and the wealth of the political and financial Elites. Precedent won't matter; survival of the State and its Elites will trump every other consideration. All this raises an interesting question: what would America look like at $5000 an ounce gold?
While the rest of the developed (read trade deficit) world's foray into the currency wars was completely predictable and expected, there was one country that had so far kept very silent on the topic of Japan's attempts to crush its currency: its main export competitor, South Korea. Recall that for this Asian nation exports are everything, and as Yonhap reminds us, "exports of goods and services amounted to 538.5 trillion won (US$506 billion) in the January-September period, or 57.3 percent of the nation's gross domestic product (GDP), according to the data by the Bank of Korea. The reading was higher than 56.2 percent tallied for all of 2011 and the highest since the central bank began compiling related data in 1970, and South Korea's exports accounted for 13.2 percent of its GDP." The reason for South Korea's relative silence is that, as we showed yesterday, in the global race to debase launched with the end of the Bretton Woods, it was the undisputed leader, outdoing even the US. Moments ago South Korea may have just had enough and broke the seal on its code of silence. As Reuters reports, "South Korea said that while the Group of 20 nations at their meeting last weekend did not single out Japan for monetary and fiscal measures that have weakened the yen, the group did not exactly endorse Japan's quantitative easing policy, which in fact stirred controversy."
Keep your eyes on the prize. The important part of the G20 statement had nothing to do with currency wars.
While the G-20 and the G-7 haggle among each other, all (with perhaps the exception of France) desperate to make it seem that Japan's recent currency manipulation is not really manipulation, and that the plunge in the Yen was an indirect, "unexpected" consequence of BOJ monetary policy (when in reality as Richard Koo explained it is merely a ploy to avoid the spotlight falling on each and every other G-7/20 member, all of which are engaged in the same type of currency wars which eventually will all morph into trade wars), Europe's energy powerhouse Norway quietly entered into the war. From Bloomberg: "Norges Bank is ready to cut interest rates further to counter krone gains that interfere with the inflation target, Governor Oeystein Olsen said. “If it gets too strong over time, leading to inflation that’s too low, we will act,” Olsen said yesterday in an interview at his office in Oslo.
Paul Krugman is all for currency wars, but not trade wars: "...First of all, what people think they know about past currency wars isn’t actually true... And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy..." There is a serious intellectual error here, typical of much of the recent discussion of this issue. A currency war is by definition a low-level form of a trade war because currencies are internationally traded commodities. The intent (and there is much circumstantial evidence to suggest that Japan at least is acting with mercantilist intent, but that is another story for another day) is not relevant — currency depreciation is currency depreciation and still has the same effects on creditors and trade partners, whatever the claimed intent. The risks of disorder and disruption are still very real today.
Curious why nobody at the G-7 or G-20 had the gall to outright accuse Japan of currency manipulation? Simple: because everyone else in the G-7 and G-20 has been doing precisely what Japan only recently started doing a few months ago. As such, it would be outright "glass house" hypocrisy if there was a formal Japanese condemnation by the group of overlevered nations, which moments ago released its draft communique not naming the island nation outright as was widely expected. Of course, that the G-20 did not accuse Japan of engaging in what everyone clearly knows is currency war, does not mean that everyone else is not doing this. To the contrary: they are, and the lack of a stern rebuke of Japan simply means the currency wars will now intensify, devolving into the same protectionism and trade wars as the first Great Depression was so familiar with, which to borrow a parallel from history again, will end with the kind of war that ultimately ended the first Great Depression.
How do you hedge when shots are pips? The next world war will be computerized. The global economy is on the brink and battle lines are forming with one objective, restoring economic balance. Properly engineered devaluation measures would accomplish precisely that. This is a new age of currency wars. In the past countries would directly manipulate the value of their currency with trade wars and the like. But today’s currency war is a result of unconventional monetary policy by central banks, which indirectly impacts the value of a countries currency.
The price action in the foreign exchange market is choppy as short-term participants seem nervous after being whipsawed yesterday. Sterling fell nearly a cent to new multi-month lows following the BOE's inflation report that confirmed official expectations that price pressures will remain above target and King welcomed the recent depreciation of the point. Also of note the Australian dollar, which staged a sharp recovery off the year's lows yesterday and has seen follow through buying today, helped perhaps by gains in a consumer confidence measure.
The was nothing in the rogue G7 sourced comment yesterday that that Japanese Finance Minister Aso did not say prior to the G7 statement and before the weekend. The pace of the yen's depreciation was too fast. The market reacted to it at the time.
First domestic fiscal policy, and now global monetary policy has become an utter circus:
- G7 OFFICIAL SAYS G7 STATEMENT WAS MISINTERPRETED, STATEMENT SIGNALED CONCERN ABOUT EXCESS MOVES IN JAPANESE YEN
- G-7 OFFICIAL: G-7 CONCERNED ABOUT UNILATERAL GUIDANCE ON YEN
- G7 OFFICIAL SAYS G7 IS CONCERNED ABOUT UNILATERAL GUIDANCE ON THE YEN, JAPAN WILL BE IN SPOTLIGHT AT G20 MEETING IN MOSCOW
We already mocked the G-7's original stupidity... and now they say it was not what they meant. Because what the G-7 clarification really means it that while the G-7 will supposedly "allow the market to set rates", the G-7 was not happy with how the market set rates following the G-7 statement. And... #Ref!
Currency War ... Trade War ... Hot War
Following on from our earlier discussion of how a Chinese hard landing would evolve, SocGen now examines how a Chinese hard landing would impact the global economy. They see the contagion in several ways: mechanically (since China is part of the global economy) and through trade, financial and market channels. Mechanically, a slump in Chinese GDP growth to just 3% would cut our global GDP growth forecast by 0.6pp. Add to that the channels of transmission to the global economy, and our expectation is that a Chinese hard landing would result in 1.5pp being slashed from global GDP growth in the first year.
While the cost of living has become a problem for some in the US (courtesy of the Fed’s inflationary policies) it’s become a real nightmare for many in the emerging markets where as much as 50% of income is spent by consumers on food.
The Bank of Korea increased gold reserves 20% last month to diversify investments, boosting holdings for the fourth time since June 2011 and underscoring increased demand by central banks according to Bloomberg. The bank added 14 metric tons in November, bringing the total to 84.4 tons, the bank said in a statement today. By value, holdings increased about $780 million to $3.76 billion, equivalent to 1.2% of total reserves, the bank said. “Gold is a physical, safe asset,” the Bank of Korea said in the statement. The precious metal “is a way of diversification, which helps reduce investment risk in terms of foreign-exchange reserves management,” it said. The Bank of Korea bought 16 tons in July, 15 tons in November 2011 a further 25 tons over a one-month period from June to July last year.
Beggaring thy neighbour has consequences. Neighbours might turn around and bite back. How long until other nations join with Brazil in declaring trade measures against the United States is uncertain, but there may be few other options on the table for creditors wanting to get their pound of flesh, or nations wishing to protect domestic industries. After all, the currency wars won’t just go away; competitive devaluation is like trying to get the last word in an argument. The real question is whether the present argument will lead to a fistfight.