Currency Wars Update

Tyler Durden's picture

Yesterday, the fine folks of Tradition Analytics were kind enough to explain (once again) just how it is that the Fed has boxed itself into a corner, where in order to maintain the already outlierish growth rate of monetary supply, the Fed will have no choice but to print (same with the ECB), or else risk a massive economic collapse (thank you Austrian theory). Today, the same group provides an update on what everyone knows has been the status quo's only way of dealing with the deleveraging tsunami since March 18, 2009: currency warfare. In the note below, they provide a recap of the recent history of FX warfare, as well as an update of where we stand currently. Keep in mind, currency warfare only works to a point. Then it escalates into other, more violent forms, first trade wars, then real ones.

Recent History


From 1999 to 2011, the average growth rate of global foreign exchange reserves is just over 16% annually. At the start of 1999, global foreign exchange reserves stood at $1.6 trillion, before climbing above $5 trillion in 2006, before doubling and breaching the $10 trillion mark for the first time ever in Q2 2011.

Of particular interest is that a breakdown of this growth between developed economies (DMs) and emerging and developing economies (EMs) shows that EMs have debased their currencies at a much faster rate than DMs over the past decade. The average rate of EM reserve growth over the past 12 years is 23%, compared with 10% for DMs. This means that EMs have been creating massive monetary inflation in their domestic economies, and this is confirmed in money supply data, and was also reflected in the accelerating price inflation that these economies experienced from 2005 to 2008.


Noting the pie charts included on the following page, see how DMs holdings as a percent of total global reserves have grown since 1999. From 38% in 1999, DMs now hold 68% of global foreign reserves.

And here is where we are now:

Current phase of the currency wars


As shown on the chart above, EM economies are currently stepping up foreign reserve accumulation, outstripping the pace of forex accumulation of DMs by a substantial margin. This comes at a time when EM economies are slowing substantially, which means EMs are likely to see accelerating price inflation in 2012 as this new money seeps into their respective economies.


The very aggressive forex accumulation by EMs during the boom phase of 2002 to 2008 now has them in a sense trapped; they must continue to create money supply at the same or faster rate as before in order to keep domestic growth supported. These central banks can buy all kinds of assets to achieve this goal, but if they don’t continue to support and buy DM currencies, the major currencies may weaken to such an extent that emerging economies lose their export markets as their currencies strengthen. Also, if they did not buy DM currencies but rather bought domestic assets with newly printed base money, it would result in tremendous asset price inflation as well as consumer price inflation in their domestic economies. As a result, emerging economy governments are forced into buying USD, JPY, GBP and EUR to hold as part of their reserves.


Of course, the more EM governments acquire DM currencies, the more influence the former governments will have on the global stage, as a BRIC economic block. It creates the potential for the currency war to evolve from a currency debasement issue to EM governments using this as a way to force DM governments into submission. To illustrate, should China threaten to dump huge chunks of USD and EUR if NATO was to start a war with Iran, it could prove very effective as it would threaten the collapse of these currencies and potentially trigger a hyperinflationary economic collapse that would send interest rates skyrocketing in the US and Europe. Of course, this would threaten Chinese export markets, so it is unlikely to happen. However, the strategic implications of holding more of someone else’s debts are clear.


That said, note that there is a major shift in the composition of global FX reserves taking place at present. All governments have scaled down the pace of USD, GBP and EUR purchases by a significant margin over the past year, while “other currencies”, the JPY and CHF have seen rising interest as foreign reserve assets. “Other currencies” include mainly emerging market currencies that are becoming more reservable, as well as the AUD and CAD.
From Q1 2010 to Q2 2011, USD, GBP and EUR assets forming part of total global reserves grew by 14%, 14%, and 15%, respectively.


“Other”, JPY, and CHF in total reserve holdings have grown 59%, 52%, and 34% respectively over the same period. There is a very definite shift taking place, whereby emerging economies are beginning to buy up increasing amounts of currencies with lower interest rate and currency risk.


Ultimately, the currency war is won by the government that can debase its currency at the fastest rate while still boosting employment creation and manufacturing capacity in its domestic economy. This is why China’s currency policy is scorned by the West, they have managed to maintain a weak currency while becoming an economic powerhouse. Other countries feel China has achieved this at the expense of their own economies.


While all governments are simultaneously in the process of debasing currencies against one another by increasing respective money supplies, they cannot debase the value of real assets as they do not and cannot control and manipulate its supply. As a result, the global economy is bound to see continued increases of commodity prices across the board in nearly each and every currency denomination. It is set to result in a global price inflationary environment if the currency wars continue, which we expect will. Monetary metals such as gold and silver stand to benefit tremendously as the currency wars continue.

h/t Converttrader13

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misterc's picture

EURUSD movement smells like insider trading ahead of a FrAAAnce downgrade.

falak pema's picture

planned for February 29, 2012!!

falak pema's picture

Leap year>Frogs>birthday of leap frogs. There. 

Oh regional Indian's picture

Falak, yesterday I saw an Auto-Rickshaw (tuk tuk for the un-initiated), with FALAK in big bold letters on it's wind-shield. Good fun.

As fer Current Sea wars? It's the sub-set of the oil wars and super set of the PM wars.

Out of context if all three are not shown together. Price action is all relative.



Orly's picture

Two of my favourite fellows, back-to-back.

Greetings, gents!

Oh regional Indian's picture

Orly! Where have you been? Good to see you. :-)


BigJim's picture

...Leap year>Frogs>birthday of leap frogs. There.

You sly dog, you!

PulauHantu29's picture

Are these numbers "seasonally adjusted?"

infotechsailor's picture


Press TV banned in England over criticisms of British Government.

Irish66's picture

well all be, times are changing rapidly, hold on

gmrpeabody's picture

"Press TV banned"

Yes..., and they will be sorely missed,I'm sure. <sarc>

Stax Edwards's picture

Damn brits should have known better than to allow all of thos iranians to immigrate over there.  Going to the city is like taking a trip to Tehran.  GD mosques all over the place and mullahs walking around on the streets. 


GeneMarchbanks's picture

'This black stain will be recorded in history along with other acts of aggression of the British monarchy.'

Those Persians are making too much sense, don't worry, they'll manipulate the Yanks into a bombing in no time...

Stax Edwards's picture

Persian is what Iranians claim to be so they don't have to say they are from Iran. 

xela2200's picture

"EURUSD movement smells like insider trading ahead of a FrAAAnce downgrade."

Looks like banks trying to get the FED to print. The US cannot have the euro below 1.30 especially in an election year. The USD is turning into a big wrecking ball for the economy not just commodity or stock prices. Wait until those GDP and unemployment numbers start to hit the news media.

Damn, why is it that 2012 is starting to look like the worst financial year of our lives? Hopefully, it is just the inevitable cynicism that comes with age. :-)

GeneMarchbanks's picture

Currency Wars, Bitchez!

Nothing new here, except we might skip that trade war and just go to plain old fashioned war.

spiral_eyes's picture

"The United States is turning our attention to the vast potential of the Asia-Pacific region.

— Barack H. Obama

And hey! Putin is in hot water in Russia. So he too will want a new war to grasp a fuller grip on power. Everyone wins! Higher aggregate demand! Social darwinism! Military-Keynesianism!


Fuck yeh! 

hedgeless_horseman's picture



...we might skip that trade war and just go to plain old fashioned war.

The MIC says Episode 2 will be The Drone Wars

ZippyDooDah's picture

Didn't you watch Star Wars?  That should be The Clone Wars.

GeneMarchbanks's picture

My hope is that Keynesians, Monetarists and Austrians are all wrong and we just have a Minsky moment meltdown where everyone is too stunned to actually go to war. Either that or a natural catastrophe of Biblical magnitude that would, paradoxically, save us from ourselves.

What are your New Years hopes and dreams, h_h?

economics1996's picture

Austrians predict;

1.  War.

2.  Austerity over decades.

3.  Inflation.

4.  Deflation and liquidation of mal-investments.

economics1996's picture

Keynesians predict;

1.  Print more money to fill the GDP gap.

2.  Borrow more money to fill the GDP gap.

3.  Tax more money to pay other people to fill the GDP gap.

4.  Tax savers and spend the money to fill the GDP gap.

economics1996's picture

Monetarist predicts;

1.  Print some more money and pass it around to bankers.

2.  Print more money and pass it around to politicians.

3.  Remove gold and silver from marketplace.

non_anon's picture

I'd say a precursor to WW3

hugovanderbubble's picture

I think we are in the III WW currently....

Not all Wars are physical...this has begun financially

navy62802's picture

If you go back to the beginning of WWI, you can draw a line of causality all the way from that war to our present conflicts. I would argue that we have been engaged in a single global war for the past century with various hot spots of different intensity throughout those 100 years.

Vergeltung's picture

excellent point. top notch. +100


(whoever gave you the down ding, lacks a clear historical understanding)



gmrpeabody's picture

I've been telling my family since they were puppies, that WW ver1.0 has never been resolved on many different levels. You have to give the Koreans credit, at least they call a spade a spade.

fuu's picture

WW1 can be traced back to the 30 Year War.

Dadburnitpa's picture

Correct.  Just as the US Civil War is traced to the Revolutionary War and the unsolved issues.

xela2200's picture

I still think that some of those Civil War issues might resurface at some point. I remember when I passed through North Carolina once a few years back and heard some southern bells complaining about Yankees screwing the state. North Carolina never surrendered. :-)

laserjock's picture

Yes, Yankees have screwed our state.  Higher tax burden than Mass. now, thanks to all the dipshits moving down here from Jersey who don't undestand all the superfluous government services they got used to up there cost money but since they've started clamoring for them here I hope the'll understand.  SC is next on their list.

eurusdog's picture

I wouldn't agree that the line is "causality", but one of near perfect "correlation" (1).

Caviar Emptor's picture

Your point is a perfect illustration of recency bias. Ongoing warfare was the reality and the norm and long periods of peace and prosperity as seen in the 20th century were the anomaly. Keep in mind that in every generation prior to WW1 there was an epic, devastating war that detroyed a nearly identical proportion of the population on a % basis. It was just accepted. THe only major shift was ww2 where the casualties became mostly civilian and less armed forces. It was "state-sponsored terrorism" warfare. Prior to that wars were fought on battle fields. 

uno's picture

only one "state" has been at war for 10+ years, otherwise it would be all quiet throughout the world; Libya having a gold and silver dinar and highest standard of living in Africa, Africa standard of living improving with Libya's help, Iraq selling oil for Euros, Pakistan worrying about India instead of US

Mr Lennon Hendrix's picture

I'll point out here that Native Americans went to war, on average, only every few generations, because when there is only 50 people in your tribe, a war will wipe out your bloodline. 

Usually if there was a problem between tribes, it was settled by a top warrior from one tribe and a top one from another. 

hivekiller's picture

Sounds like West Side Story on the reservation.

xela2200's picture

The 20th century was marked by a great time of prosperity/abundance brought about by energy (Oil, Coal) and innovation. However, human history has been one of fighting over resources, so I suspect that once these become scarce, war is inevitable. I mean, come on, 9 Billion people by 2050. That is the world's carrying capacity with infinity oil. The only way to equilibrium will be famine or war. I hoped that capitalism through its price mechanisms will prevent coming to that. Now, I see that when capitalism tries to balance, politicians and economist call it a failure and go into a command/directed economy under the guise of stimulus and investment.

Lord Koos's picture

If you go all the way back to Adam & Eve, you can draw a line of causality all the way from then to every war.

ucsbcanuck's picture

Did Adam & Eve actually exist? Creationist!

87GN's picture

Just replace "adam and eve" with "2 apes flinging shit at each other"

ucsbcanuck's picture

I was kidding there OK. Could be two amoeba flagellating something at each other for all I know.

Irish66's picture

Can someone explain the drop in euro price verses the swaps 

NooooB's picture

Someone else is selling more than the ECB is tying up with the US??

Mike2756's picture

The question is: when will they qe again?

GeneMarchbanks's picture

Notional GDP targeting is next. Print until you hit your desired GDP target, inflation be damned. Begins January 1st, but they'll announce it later than that.

xela2200's picture

Agree. Launching a new "QE" would be a very unpopular move. If the FED goes through the pain one more time, they might as well just make it an ongoing program. Like some sort of inflation adjusted GDP target. I don't think financially anybody escaped (other than insiders and politicians) this year without feeling some pain. The notion of "liquidity" is probably more palatable today than it was 6 months ago. The "do something" mentality from the average Joe will hit soon. Politicians only know how to spend, and the FED only knows how to print.

Catequil's picture

QE has a half-life. Each new QE has less efficiency meaning shorter (in terms of duration and also magnitude) economic upswing at the price of higher inflation (the real one, not the FED's one), widening wealth gap hence social unrest. Each new QE puts the Status Quo at jeopardy ever more.

Wake-up. NO QE any time sooon, especially in an election year!!!!