Wednesday, October 13, 2010

Currency Wars:Racing to the Bottom in the End Game

(10-11-10) All countries are in a race to the bottom as currencies around the planet are dropping in what has been called the "currency wars."

What does this mean? Central banks are attempting to cheapen the currencies of their own countries and get them cheaper than those currenciesthat they trade against. In other words, the Fed is trying to cheapen the Dollar relative to its principal "trading basket, which in this case refers to those countries that the United States does the most business with.

However, this doesn't include the Chinese Yuan, which is not a freely exchanged or "free to float" currency. Thus the Yuan is creating a pressure on all the planet's currenciesbecause the Chinese refuse to make it a "free to float" currency, which means it would be freely exchangeable.

In other words, China is still maintaining a state-orchestrated trading band, wherein the Yuan is allowed to trade in a small fixed range against all other currencies. The Chinese are gradually loosening the peg so that the Yuan has appreciated and continues to appreciate by about 3% per annum against the US Dollar as well as other currencies.
The reason everyone is beating up on China on this issue is because Chinese actions have artificially depressed the exchange value of the Yuan, thus giving the Chinese a trade advantage vis-à-vis their exports.

Everybody is in a race to the bottom to devalue their currencies. All the central banks except for China are attempting to cheapen their currencies to gain export advantage against their competitors and those they do business with.

Also the reason they are attempting to gain advantage via the use of currency cheapening is because the only other way to gain advantage is to move to out-and-out trade wars, or trade restrictions through tariffs.

However everyone is frightened to go down that road because of what happened in 1930, namely the results of Smoot-Hawley, which made the Depression much worse than it otherwise would have been.

This happened when all countries erected trade barriers through the use of exorbitant tariffs, so that all countries were able to keep out the exports of every other country. Why was this so bad? Because net of tariffs, goods and services could not be exported between countries and still be profitable.

For example Germany would try to export what it had always exported in the 1920s and 1930, small specialty manufactured items but they couldn't compete, net of tariff.

The tariffs made their goods too expensive to compete with domestically made products.

Now everyone is trying to avoid a circa 1930 trade war because they know what will happen, which is that it causes a depression. Why? Because countries' manufacturing bases become severely curtailed since their export business has dried up.

The second reason everyone's in this race to the bottom is to give every central bank the ability to monetize their own debt, which they are desperate to do in order to expand their balance sheets, i.e. issuing ever more debt and then paying it back in a currency that is worth ever less to pay back.

So how do the IMF's so-called "austerity" measures come into play wherein people are protesting in Europe? These austerity measures are directed to the so-called "peripheral" Euro-states -- Ireland, Portugal, Greece, Spain, etc. which means sucking off the largesse of the German taxpayer. So how will this end?

For the rest of this column by Independent Political/Market Analyst Al Martin -- and Exclusive News-Analysis every week -- log on to Al Martin Raw -- another antidote to Government-Media Cartel Propaganda.

* AL MARTIN is an independent geo-political/ economic analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. He is considered to be a source of independent analysis for financially sophisticated and market savvy investors, as well as subscribers who want to understand the behind the scenes working of markets worldwide.

Al Martin's website "Insider Intelligence" Insider Intelligence provides a long term macro-view of world markets as well as weekly commodity trading recommendations.

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