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All About Debase: Not

Marc To Market's picture




 

Megan Trainor tells us it is "All About the Bass".  It seems like many reporters and analysts may be mistaking her lyrics as it is all about debase, as in currency wars.

The latest surge of currency war stories follow the unexpected decision by the Bank of Japan to dramatically increase its Qualitative and Quantitative Easing at the end of October.  It was  the same week that the Federal Reserve announced the end of its asset purchase operations.   Since the BOJ's decision, the yen has depreciated by 8.3%. 

There has been little push back from the international community.  Nothing from the G20, the G7 or the US Treasury.   Even South Korean rhetoric has been fairly circumspect.  By  a unanimous decision, the central bank left rates on hold a couple weeks after the BOJ's move.  The minutes of the South Korean central bank showed one member warning that concerns about the weak yen and deflation are exaggerated.  Another recognized that the impact of yen's depreciation on Korea has been limited.

South Korea did cut rates in October, but this was before the Bank of Japan's move.  After denying the need to provide broad economic support, the PBOC cut the one-year deposit rate for the first time in two years.  Although the move surprised many investors, there was little if any doubt that the PBOC was motivated by domestic issues, including softening inflation and falling house prices.

Like China, monetary policy developments in emerging Asia is driven primarily by domestic variables.  Several countries, like Philippines, Malaysia, Indonesia, and India were in a tightening mode, but are now seen on hold.  Taiwan and Singapore have been on hold for an extended period.  When the monetary stance changes, it will be because of domestic price pressures and the growth outlook.

Some observers are worried about a repeat of the 1997-98 Asian financial crisis.  They argue that that crisis was precipitated by the depreciation of the yen.  At the time, many Asian countries had dollar liabilities and yen receivables.  This mismatch is not nearly as pronounced now.  The reason is that rise of China.  China is the largest trading partner of most of emerging Asia.  Ironically, the close link of the yuan to the US dollar serves to minimize the volatility of the region's currency mismatch.

Ambrose Evans-Pritchard, the International business editor at The Telegraph recognizes that the launch the BOJ's aggressive monetary policy experiment did not trigger a currency war, despite many claiming otherwise because the yen was significantly over-valued.  This is not the case anymore, which is why he is worried that "Japan risks Asian currency war with fresh QE blitz".

Indeed, the OECD's measure of purchasing power parity shows the yen to be now under-valued by 14.5% against the US dollar.  It is the most under-valued of the major currencies.    On the eve of Abe's election two years ago, the OECD estimated the yen was about 23% over-valued.  By the OECD's reckoning, the yen is the most under-valued in nearly 30 years. 

This may seem to help explain why the launching of QQE in April 2012 did not spark a currency war, but it does shed light on why there has been little or no resistance to the BOJ's latest efforts.  Could it be that Japanese exports in volume terms are roughly flat?  Could it be that Japanese businesses are not taking advantage of the weak yen to boost market share in foreign markets?

Many observers seem to confuse means with ends.  The goal is not a weaker currency to boost exports. The goal is to stimulate the economy and arrest deflation.  It is not a race to debase, but an effort to provide monetary support for an economy that has reached the zero bound, and one in which fiscal policy is largely exhausted (Japan's debt is over 230% of GDP).  This was one of the concerns that Moody's expressed when it cut Japan's debt rate to A1, which is below the rating agencies assessment of China. 

Countries have to be free to pursue the monetary policy that is required by its domestic economy without being accused of starting a currency war.      Many countries face slow growth and weak price pressures.  They could seek to drive their currencies lower.   This could be a zero-sum exercise if it results in simply taking the aggregate demand from its trade partners.  Alternatively, countries can respond by stimulating their own domestic demand via monetary and fiscal policies and structural reforms that boost potential growth.

Megan Trainor had it right.  It is all about the bass.  Not debase.

 

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Wed, 12/03/2014 - 10:48 | 5512342 hedgiex
hedgiex's picture

It is each nation for itself or more precisely each preying class in each nation for themselves. Call their actions; currency wars or debasement or whatever do not mask this reality.

The potencies of the various traps (QEs, etc) are muted in their respective habitats by smarter preys that can still escape as well as the shrewder predators who do not gobble at one go.

This Megan piece is a concotion of selective facts and conjectures to BS with another label "Bass". There is no rigor in this spin. Try harder at ZH.

 

Tue, 12/02/2014 - 16:03 | 5509890 ebworthen
ebworthen's picture

"Alternatively, countries can respond by stimulating their own domestic demand via monetary and fiscal policies and structural reforms that boost potential growth"

That's the problem - countries do not & cannot boost growth with these policies, they only debase the labor of individuals.  The purpose of the currency jiggering and QE is to enrich banks and punish savers.

Tue, 12/02/2014 - 14:43 | 5509450 Consuelo
Consuelo's picture

"Many observers seem to confuse means with ends.  The goal is not a weaker currency to boost exports. The goal is to stimulate the economy and arrest deflation."

A distinction without a difference...?

Tue, 12/02/2014 - 14:32 | 5509368 lasvegaspersona
lasvegaspersona's picture

maybe he means ....bass?

Wed, 12/03/2014 - 00:17 | 5511445 taraxias
taraxias's picture

Kyle Bass

Tue, 12/02/2014 - 13:26 | 5509025 RhoneGSM
RhoneGSM's picture

Anybody that believes this please contact me.  I have a lovely bridge for sale. Very reasonable price.

 

Tue, 12/02/2014 - 13:38 | 5509083 SickDollar
SickDollar's picture

LMAO

i have the  Goerge Washington Bridge on sale

 

Tue, 12/02/2014 - 13:43 | 5509109 Bear
Bear's picture

Just thinking, that would be a great gift for my bride this Christmas ... How much are you asking? Also can I move it to a better location?

Wed, 12/03/2014 - 00:26 | 5511464 taraxias
taraxias's picture

Who writes this bullshit?

The reason why we haven't seen a currency war is because all major central banks are acting in a coordinated manner to try to bring back to life this carcass called global economy before it finally takes their owners (tbtf banks) down.

All other explanations is like trying to play Vivaldi's four seasons with a fiddle without strings.

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