So far, China and Japan have stealen the show when it comes to currency wars in 2013. China was the first to announce several trading agreements with its major trading partners. Although these have no short term impact on the US dollar (the world reserve currency) it is fair to expact a longer term fundamental impact. What follows are some snippets that show the most important of those agreements in the past couple of months.
Recently, author John Rubino wrote that “dollars make up about 62% of allocated central bank currency reserves, with the other 38% in mostly euros and pound sterling. The yen accounts for 4%, and the Chinese yuan virtually zero.” China being the biggest trading power in the world, it is somehow strange that the dollar is still dominating world trade. Rubino points out that this odd phenomenon is simply related to a habit that exists for 7 decades now (since World War II). However, that “good old habit” is coming to an end, driven by the increasing number of bi-lateral trade deals between China and its trading partners. Those agreements are settled in local currencies instead of dollars, so more yuan and real reserves, and correspondingly fewer dollars, are required.” In that respect we have seen the following announcements since the start of this year:
South Africa signed a raft of agreements with Russia and China in March to trade a variety of products and services ranging from maintenance for Russian helicopters in Africa to exchanges of solar and nuclear technology. (source: NECN.com)
South Korea said it agreed with China to allow banks in both countries to borrow funds from an existing swap arrangement to encourage trade settlement in local currencies. A 64 trillion won ($59 billion) swap line will be made available for loans to allow companies in both countries to settle deals in the won and yuan. (source: Bloomberg)
Australia and China reach a currency trading agreement. “This is a huge advantage for Australia. Not only for our big businesses but also for our small and medium enterprises hat want to do business here. That’s good for Australian jobs and Australian growth.” (source: News.com)
Brazil and China could sign an agreement that allows for trade of up to $30 billion to be carried out in local currencies. The two countries, which are taking part in a meeting with fellow BRICS members – an economic bloc consisting of Brazil, Russia, India, China and South Africa – are also in talks to extend the local-currency trade agreement to the entire bloc. (source: WSJ)
The move marks the first agreement of its kind within BRICS and is an important step in internalizing the yuan, China’s currency. China has made similar agreements with more than 20 countries, including the Republic of Korea, Malaysia and New Zealand, with total capital amounting to over 1 trillion yuan. (source: China.org.cn)
In fact, it was Japan this year that really accelerated the currency war after announcing their monetary bazooka of historic proportions. Their monetary stimulus has blown away even helicopter Ben. It is resulting in a structural devaluation of their currency and local inflation. During his latest TV appearance Jim Rickards describes this evolution as follows:
Currency wars are like any war. It is not a continuous warfare; you have big battles, and then you have quiet periods. We went through a quiet period up until December. Then the Bank of Japan started a big battle which has been resonating around the world. Japan is sucking the whole world down with their policy which is so aggressive that their trading partners have to cut rates or go to quantitative easing. (source: CNBC)
The latest participant in this global game is Russia. Not coincidentally is it another country in the BRICS complex, one that was hit by the measures in Cyprus. It remains pure speculation if there is a link between the two aforementioned events, but common sense would say there is a smell to it. In general, the message from the BRICS appears to point to the same direction: an urgent dismantle of the dollar system.
According to Testosteronpit, a site dedicated to bringing the truth behind economic and financial developments, wrote that the Kremlin administration has produced a document describing the Russian strategy to step-by-step dismantle the existing global financial system. The list of measures includes the following:
Reformation of the world currency system in order to create a representative, stable and predictable system of world reserve currencies;
- Reduction of the risks of destabilization of currency and equity markets linked to massive cross-border flows of capital;
- Increasing the use of national currencies in the trade between BRICS countries;
- Increasing the level of cooperation between BRICS countries in order to promote their interest in the domain of world trade;
- Strengthening the BRICS Exchange Alliance;
- Creating independent rating agencies.
The global currency war
Jim Rickards gave a fantastic explanation on how this global fight is playing out. His central point is that two “teams” of countries have been formed. One is led by the US and includes the UK / Japan / Europe. The other team includes the rest of the world. All of the above evolutions fit perfectly in his vision.
The Fed has said that if Japan, US, UK, and Europe all ease together it is not a currency war. The result is that you only get a stimulus and not a change in comparative terms of the cross rates. If that theory applies to that four, what about the rest of the world? It is not anymore the G20 against each other; it becomes the G4 against the G16. It is still a currency war with four big economies in one team and the rest of the world (China, Taiwan, South-Korea, Indonesia, etc) in the other team. There are still losers, China is one of those losers. Their currency has to go up otherwise they will face inflation. They basically have two choices (1) either they leave the currency go up which hurts exports (2) or accept the inflation coming from the Fed which is very destabilizing. (source: CNBC)
Two additional comments. One comes from Jesse, who described an analogy with colonialism.
This has come to resemble a form of financial neo-colonialism. And I hardly think that this is an overstatement of the situation, especially if one considers the meme of ‘economic hitmen.’ But this involves more than just the currency. It includes the interwoven apparatus of the World Bank, the IMF, the Federal Reserve and its clients, the dominance of multinational TBTF banks that enjoy strong government subsidies, the three major US credit ratings agencies, and the NY-London metals complex. And this Frankstein’s monster is tottering badly, but seeking to sustain itself at all cost. (source: Jesse)
The second comment comes from ourselves. It is really ironic to see the crash in the gold price exactly at a time when currencies are being destroyed all over the world. This really cannot be any coincidence. We sense that this is designed to scare people out of gold and silver bullion. Although the price of gold could go lower (it probably will), the underlying value is increasing with the day. Hold on to your gold holdings, and keep it outside the banking system. There is simply too much trouble with our monetary system and currencies for a justification of the end of gold’s bull market, no matter the short term price action.