"Beggar Thy Neighbor" Is Back: Goldman's Five Things To Watch As Currency Wars Return

Tyler Durden's picture

"We’re seeing a new era of currency wars," Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon in London. This is what Bloomberg reported today in a piece titled "Race to Bottom Resumes as Central Bankers Ease Anew." It adds: "The global currency wars are heating up again as central banks embark on a new round of easing to combat a slowdown in growth.  The European Central Bank cut its key rate last week in a decision some investors say was intended in part to curb the euro after it soared to the strongest since 2011. The same day, Czech policy makers said they were intervening in the currency market for the first time in 11 years to weaken the koruna. New Zealand said it may delay rate increases to temper its dollar, and Australia warned the Aussie is “uncomfortably high."

For the most part Bloomberg's account is accurate, although it has one fundamental flaw: currency wars never left, but were merely put on hiatus as the liquidity tsunami resulting from the BOJ's mega easing lifted all boats for a few months. And now that the world has habituated to nearly $200 billion in new flow every month (and much more when adding China's monthly new loan creation), the time to extract marginal gains from a world in which global trade continues to contract despite the ongoing surge in global liquidity, central banks are back to doing the one thing they can - printing more.

The moves threaten to spark a new round in what Brazil Finance Minister Guido Mantega in 2010 called a “currency war,” barely two months after the Group of 20 nations pledged to “refrain from competitive devaluation.”


“There are places in the world where economies are generally quite weak, where inflation is already low,” Alan Ruskin, global head of Group-of-10 foreign exchange in New York at Deutsche Bank AG, the world’s largest currency trader, said in a Nov. 8 phone interview. “Japan was in that mix for 20-odd years. Nobody wants to go there” and “the talk from Draghi shows they’re taking the disinflation story very seriously. The Czech Republic is the same story.”


Growth in global trade may slow to 2.5 percent in 2013, the new head of the World Trade Organization said after a Sept. 5-6 summit of G-20 nations in St. Petersburg, Russia, down from the organization’s previous estimate in April of 3.3 percent. Even so, the G-20 participants agreed to “refrain from competitive devaluation” and not “target our exchange rates for competitive purposes.”

It is indeed the bolded part that is the most disturbing one, and is why the most important revision in the IMF's quarterly update of its flawed forecasts, is always the chart showing the collapse in real global trade, which in 2013 is now forecast to be 50% lower than preliminary estimates.

So what should one watch for now that even the MSM admits the currency wars are "back"? Goldman lists the 5 key areas to watch as central banks resume beggar thy neighbor policies with never before seen vigor.

  • Watch for Sudden Policy Shifts – In a regime where stability is achieved via offsetting forces, a sudden change in one of these forces will lead to potentially rapid moves. Changes often result from a major policy shift, as for example seen in Japan about a year ago. The period of Sterling weakness early in the year was another example, where a central bank suddenly increased the focus on the exchange rate. A policy shift that hurt EM deficit currencies this year, in particular, was the move towards Tapering by the Fed. Changes to one of the normally offsetting forces are quite similar to revaluation or devaluations in traditional exchange rate regimes.
  • Watch Genuine Appreciation Trends – In a world where every country wants to prevent its currency from strengthening, those who actually favour a stronger currency will not face many offsetting pressures. Obviously this is conditional on stronger underlying fundamentals. In order to control the speed of appreciation, frequent smoothing operations can be necessary. This may create a scenario of relatively slow appreciation, combined with very low volatility, which in turn would imply a high Sharpe Ratio. China’s steady Renminbi appreciation remains a case in point. And in recent times the Korean Won as well.
  • Watch Policy Constraints – There may also be countries that face continued appreciation pressures but operate under policy constraints that do not allow them to respond fully. In these situations policymakers may not be able to fully prevent appreciation. The constraints could appear in various forms. Would the ECB have been able to cut rates with higher inflation rates? A strict inflation mandate reduces the flexibility for policy makers to respond to currency movements, in particular when they reflect positive growth shocks. External policy pressures could be a constraint. The discussions at the G7 may have been a factor that limited Japan’s ability to weaken the JPY further and could become a constraint in case the JPY starts to strengthen again. The US Treasury report on currencies certainly hints in that direction.
  • Watch Carry – If policymakers aim at anchoring the exchange rate in nominal terms and succeed, this does not automatically imply that there are no return opportunities. As long as interest rates differentials persist there will be carry opportunities. And again relatively low volatility may be a welcome feature which raises Sharpe ratios. How long will the RBA be able to sustain an interest rate differential of more than 2% to most other developed economies in such a scenario?
  • Watch Quasi Currencies – Finally there is even an argument that competitive devaluations could boost precious metals. That view is based on the simplification that gold, for example, is a “homeless” currency without a central bank that tries to block its appreciation. Another way of saying the same is that many asset prices may rise in response to continued and competitive monetary easing, which is a key feature of such a non-collaborative exchange rate mechanism.

But most importantly, watch Yellen and the inflection point where the consensus that tapering may/will/should be just around the corner, makes way for the anathema, namely that $85 billion per month is nowhere near enough as the Fed doubles down on its own core prerogative for 2014: ramping inflation at all costs... even if it means a return to Yellen's favorite topic: outright monetary finance.

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Rory_Breaker's picture

The last one to the bottom wins, but it's a temporary win, everyone loses in the end.

Stuck on Zero's picture

I like this:

"...central banks embark on a new round of easing to combat a slowdown in growth."

I'd like to rephrase it as follows:

"Bankers steal additional trillions from national treasuries."




buzzsaw99's picture

yeah, bankers rape world, use a bunch of fancy talk

Skateboarder's picture

Remove the illusion of accreditation an MBA provides and maybe we won't have the scummiest scum of unproductive asswipes leeching off the rest of us.

"What? My MBA, worthless? BUCK BUCK BWWWAAAAAK!?"

BigJim's picture

I doubt many central bankers have MBAs

Skateboarder's picture

No, but everyone who works for them does. They are the enablers.

Alea Iactaest's picture

The real looting hasn't even started. Wait until the bankers start demanding collateral before rolling over debt. That's the next stage. After that the banks start taking possession of collateral.

All because "it was agreed" that the can should be kicked.

Pain delayed is pain magnified. And while pain is quite an effective educator, her lessons largely have been forgotten. Almost time for school to start.

WordSmith2013's picture

The currency wars go after the very heart of the 

Global Economic & Financial Control Matrix



"The Global Economic and Financial Control Matrix Disintegrating in Real Time"
Seer's picture

Not bad.

I think, however, that it's all no more than human nature expressed through great leverage, leverage made available by those very empowering resources that it is consuming and exhausting: I think the article kind of says this, though it doesn't note, as I always do, that the "strategy" only leads to certain collapse.

Bearwagon's picture

As was demonstrated by the Sackman Golds Draghi, the key to success of "outright monetary finance" would be to only announce but never do it.

SWCroaker's picture

Sherlock Holmes hi-lighted the tactic of noticing what is missing: the dog that *didn't* bark in the night.

Apply that to the modern world, and you get a collection of interesting missing things.   Cities and states are no longer crying for assistance, but a few years back they were desperate.  Greek/Spanish/French citizens never seem to have their checks bounce.  Not a county in the world runs a surplus, yet all seem to have no problem finding low-interest loans from "foreigners". 

I strongly suspect Draghi (and each of our naughty Central Banks) *do it*, and do it often; they've just stopped admitting it.  Talking about *doing it* is just a distraction that gets credit for money creation that is ongoing in a system with no checks, balances, or outside auditing.

Seer's picture

It would be fun to put together a video collage of all the "leaders" yammering in the past about others "manipulating" their currencies.  And then compare to what they are doing now.

ultraticum's picture

"'homeless' currency without a central bank that tries to block its appreciation."


Correction:  "witout a central bank that doesn't try to block its appreciation."



Max Damage's picture

And Goldmans say sell Gold? Lols

Winston Churchill's picture

'cause they are buying.

Silly Muppet.

RaceToTheBottom's picture

Race to the bottom or get off the bus, Gus?

The choice is yours.

PS, it was interesting that number 5 hinted but did not mention virtual, alternate currencies like bitcoins

Seer's picture

The theory/idea behind Bitcoins is good, until you encounter things like typhoon Haiyan.

Having been in the business where "infrastructure" is key one realizes how fragile things can be.  And even here in a rural area that hasn't been hammered by a typhoon there are people that wouldn't be able to "do" Bitcoin because they don't have the infrastructure.  So, as a rural person I tend to see this as a "city" "solution."

Quinvarius's picture

Goldman floats the theory that inflation may effect the price of gold as if there isn't an entire human history long body of evidence to support that theory.  Yeah.  It might effect the price of gold because some people might see it as the real currency/money.  Good theory there.  Of couse they won't start screaming it from the rooftops until there is some momo involved.  So they will buy the top at 5500 as they sold the bottom at 1200. 

Seer's picture

Inflation affects the price of currency.  Gold (PMs) just kind of sit there... if one is looking to get MOAR currency then inflation and the purchase via PMs works for ya...

RaceToTheBottom's picture

"namely that $85 billion per month is nowhere near enough as the Fed doubles down on its own core prerogative for 2014: ramping inflation at all costs..."

I think 110billion/month on the way to 150billion/month ....

To infinity and beyond!!!!

PaperBear's picture

And now that the world has habituated to nearly $200 billion in new flow every month

They are realising that this is not enough !!!!!?????

Seer's picture

It's the way of the exponential function.  People thought that all the folks cautioning that perpetual growth on a finite planet wasn't possible were kidding?

Eeyores Enigma's picture

"...Fed doubles down on its own core prerogative for 2014: ramping inflation at all costs..."


As some A-hole snidely remarked to an earlier comment of mine;

"Inflation is when money is SPENT"

 I certainly don't see spending ramping up as jobs, wages, and salaries contract so I definitely would not call it inflation.

I would call it A massive transfer of wealth (rape) though.

Seer's picture

"wealth" was never, and is not, there.  No more so than the "wealth" during all other great bubbles.

This is all just an exercise in bumping up numbers on a spreadsheet that attempt to show that the banking industry is solvent.

We were broke BEFORE the bubble broke.  Most believe otherwise, thinking that because they had "credit" (they owed) that they weren't.  It's just that now it's OBVIOUS because most cannot roll over their credit.

Fuh Querada's picture

"... as the liquidity tsunami resulting from the BOJ's mega easing lifted all boats for a few months..."
I love these euphemisms. They must mean " all turds float at high water ".

Seer's picture

Even IF we were to all jump in lifeboats there's the matter of water having to cover all the land masses in order to lift all the boats.  Our food source, compliments of Fukushima, would be radioactive fish.  SAVED!

withglee's picture

With a properly managed Medium of Exchange, any currency managed otherwise cannot compete and thus cannot exist. There's only one way to guarantee zero INFLATION. That is to monitor DEFAULTs on trading promises (i.e. money) and collect a like amount of INTEREST. The governing relation is INFLATION = DEFAULT - INTEREST.

Anyone can introduce a properly managed MOE into the marketplace, and when they do, no other MOE (currency) can compete with it. All these currency wars will fizzel out. We may end up with many properly managed MOEs but the conversion rates will be constant everywhere at all times. As a store of value, nothing is superior.

Todd Marshall
Plantersville, TX

Seer's picture

"With a properly managed Medium of Exchange"

"Managed" = Fails right out of the shoot :-(

If you can provide a workable framework then great!  Keep in mind that most people on this planet have NO access to the Internet or iStuff.  Be sure to address how this system is to work w/o any growth.  And also be prepared to show how compliance can be enforced.

withglee's picture

You seem to have an underlying premise that a trading system can't work without growth. This is nonsense. You can trade in a growing system, in a stable system, and in a contracting system. Since all environments are finite, you must either change environments or eventually stop growing. It's perfectly reasonable to consider reaching a steady zero growth state and still have mutually beneficial and free trade.

Trading becomes difficult (stifled or exuberant) when restrictions are put on trade to achieve a growing, stable, or contracting sytem, contrary to its natural tendency. Our current system delivers this by design. The symptom is called the busniess cycle. It's a farming operation.

The Internet and iStuff has existed only for a relatively short time. Before that we had the same kind of free trade we have today ... and the same kind of improperly managed medium of change (MOE). With the internet and iStuff, we still have an improperly managed MOE. We can do better. The change could take place in a matter of weeks ... but never will because TPTB will stifle it. It takes away their gravy train.

Seer's picture

"You seem to have an underlying premise that a trading system can't work without growth."

And you, one who is trying to "plan" for others, seems to have a reading comprehension problem.  POINT OUT WHERE I SAID that it's NOT possible.

I'm asking questions.  And, as you fumble and punt (because when you get down to REAL details it all starts to become, well, the fault of "others" for why we just can't accept the part where "miracles happen").

"The change could take place in a matter of weeks ... but never will because TPTB will stifle it. It takes away their gravy train."


If a System is good enough it will trump BAD shit.  That's how nature works!  The REASON why your "solution" (and others' "solutions") ain't making it is because it's NOT good enough.


Again, as long as you require enforcers you then give others power over others -> CORRUPTION.

Thousands of years of human history and people still cannot comprehend.  And just when was the last time there was a money system that wasn't comprised of that most corrupting element "interest."

I've got nothing against unicorns.  I'd have had nothing against Black Swans either: and now they've been proven to be real- the actual birds.  But to put all my energies toward something of low probability only exposes me to things of more immediate and higher probability: can't cover every base.

You'll have your opportunity to practice YOUR system when all of the existing fails.  And if it gains widespread acceptance then great!  I do not, however, believe that any centralized "solution" is or should ever rule (see comment about corruption above).

withglee's picture

Create a system like BitCoin, where the money is not mined but mathmatically certified when traders make trading promises. Where trading promises are known to the whole marketplace and broken promises (DEFAULTS) are automatically mitigated by INTEREST collections. Where in the mean time the certificates are traded like barter with complete confidence that they hold their value for all time everywhere and that they can't be counterfeited. Do that and you have the better system. No deflationary system can ever be better. No inflationary system can ever be better. A zero inflation system cannot be improved upon. The system needs be no more centralized than BitCoin is. It need be under no more central control than BitCoin is.

The whole internet system is "bad shit". It could easily be out plussed by a system with ATM at layer 2; with UWB at layer 1; and no centrally controlled backbone but rather a mesh that gains capacity with congestion rather than choking. It would be naturally connection oriented. Such a system existed before IP (IP was built upon it), but TPTB got IP adopted and snuffed out ATM ... and now they're going for the internet cloud to further consolidate power.

Bad systems have aways prevailed over better systems ... and for long periods of time. Look how long Edison with his DC was able to stiffle Tesla. Without George Westinghouse, we would still run motors with DC.

Before I proposed the "obvious" system of proper MOE management I had never seen it described. Initially all reaction to it was shrill like yours. But that is slowly changing. It won't be long and someone will become an overnight sensation with this (like the singer who has struggled for years and then magically gets discovered and becomes a star).

withglee's picture

Enforcement, as with any control system, has to come with observation and automatic intervention. The observation is of DEFAULTs. The intervention is by automatic INTEREST collections of equal magnitude. The proof (and thus enforcement) is with transparent and immutable reporting of both. Just like any automated feedback control system, there are always perturbations. There are always exigencies. There are always attempts at purposeful disruption.

We have great experience in designing feedback control systems that detect and mitigate these things. The best way is not through laws and force but through illumination. Automatically shine light on the problem areas and on the bad actors. Like roaches they tend to go away.

Seer's picture

Quit playing games!

WTF does "AUTOMATIC" mean?  Using feel-good WORDS and not definining what they entail is no little ldifferent than today's existing deception-based system. (NOTE: nature is about deception [for survival]; humans are OF nature- yeah, we can change stripes...)

Again, quit trying to blame others for why any "superior" system isn't trumping.  Yes, I'll be the first to agree that those in power resist change, but if there's enough groundswell, that the "new" system is so superior, like Bitcoin*, then it really should be able to beat out a bad system.

In manufacturing it was said that one ought to look to kill an idea WAY before it every made it to the production line, that if by such rigors an idea made it to the production line then it stood a chance of being a viable product.

* I LOVE the "idea" of Bitcoin, but it's the "details" that concern me... Rather than get taken away by emotions (driven by the desire to stick-it-to-them) I look at things based on probabilities.  And I see the probabilities as being low for a "solution" which is wholly dependent upon an infrastructure controlled by TPTB and available only to a small fraction of humans on the planet: there is, as with all things, an issue of scalability.  If we were to spend all our energies pushing in this direction and it should fail? (we'll have signed up to be strapped more firmly to that infrastructure [because that's where our "wealth" is traded])

withglee's picture

What games? Definition of automatic? Here's from the dictionary: " Acting or operating in a manner essentially independent of external influence or control". Works for me. The operator of the system has no discretion and operation is absolutely deterministic.

"Feel good words"? What? Automatic? Control?

Blame? I just call a spade a spade.

Believe me, a properly managed MOE is superior and if (and when) it is brought into existence BitCoin is toast. But as I said, BitCoin is relatively safe, at least for the moment, because it isn't hurting TPTB (may actually be invented by them). A properly managed MOE does threaten TPTB because it is a low cost zero profit operation that cannot be gamed in the aggregate. INTEREST collections can always be shown to be exactly equal to DEFAULTs and thus INFLATION can always be guaranteed to be zero.

BitCoin copies the "scarcity" attribute for ancient definitions of money. It is a false attribute. With money being "a promise to complete a trade", scarcity plays no role except to restrict  free trade.

BitCoin, by design is  deflationary. Once all blocks have been mined, opportunists will continue mining existing blocks for alternate encription factors that can give them control of the blocks. Right now it is easier to find new blocks than to compromise existing blocks. A properly managed MOE does not go up and down like a yoyo.

By design, BitCoins is a doomed Ponzi scheme ... plain, but not too simple.

The rest of your rant I find pretty incomprehensible.

Seer's picture

Who is behind that automation?

If it isn't nature then it's not automatic.

Listen, I'm well aware of mathematics, thank you very much.  And, as someone who spent time in manufacturing and automation I'm also quite aware of "automation."

You, however, like all idealists, completely over-look the human factor.

Sorry, I'm not buying what you have to sell, no matter how "noble" you wish it to be.

Seer's picture

"Believe me"

I have a good friend that shrieks every time she hears that statement.  She says that it should go without saying, and when it's NOT being stated does that then mean that one is not to be believed?

You've been on ZH for 33 weeks.  Maybe you need a little more time to roll out The Big Plan? (which, I'm sure, should it not get accepted, will be blamed on people like myself who were wanting to see more proof)

BTW - I'm the only one who bothered to challenge you, to give you an inroad to expand on your ideas.  I suppose I should have just left it alone to shrivel and get zero notice...

moonstears's picture

" there are always perturbations. There are always exigencies", lucid for a moment there. Look, just link the site to the cryptocurrency you're selling, what is it...I'm guessing... "withgleebits.com""bitsofglee.com"?? We'll take a look.

AngelEyes00's picture

If growth keeps needing a boost due to higher oil price than it's use to (currently over $100 for Brent vs. about 20-30 during the 90's), by easing (printing), then isn't hyper-inflation inevitable?  I just don't see a way to ease our way out of this if the price of energy continues to rise or even stay as high as it is.  Either the world economy can muster sufficient growth with current oil price or it can't, but obfiscating that dilemma with easing must eventually be a losing game.


Seer's picture

Thank you!

We have to face up to the fact that there are more fundamental forces at play here.  WAY too many "solutions" are only pushed in order to profit someone, and while I'm fine with folks profiting I can not endorse something stated as being a "solution" when it is not.

jonjon831983's picture

Likely, cause groups to start dropping out of the race and begin internalization to become more independent from external reliance.

Herdee's picture

The Feds false manipulated data should be at the top of the pile of hot steaming dog-dirt of what to watch for.