Devaluations became common: Japan to join currency wars as exports slump after both Fed and ECB launched unlimited QE
Japan is poised to join the world’s “currency wars” as it battles a triple crisis of crashing exports, recession and a suffocatingly-strong yen.
The country’s exports plunged 10.3pc in September from a year ago, dimming hopes of rapid recovery in the Far East. Exports to Europe crashed 21pc. Shipments to China fell 14pc as the Diaoyu-Senkaku islands dispute led to a slump in car sales. Honda, Mazda, and Nissan all saw sales plunge near 30pc as Chinese consumers boycotted Japanese brands. Nomura said the export slump will push country into full recession.
Stephen Jen from SLJ Macro Partners said the global storm is drifting eastwards into Asia, opening a “third chapter” of the crisis that will last well into 2013. “Many analysts have declared that the low in the global economic cycle is in place. We are not convinced,” he said, prediticting a rise in currency protectionism.
Japan is the awakening giant in this conflict. The yen has risen 30pc against China’s yuan, 65pc against the euro, and 80pc against Sterling since 2008. Tokyo is itching to fight back.
Mr Redeker expects the yen to weaken from 79 to 84 by Christmas, reaching 90 next year. “We think Japan will no longer be able to fund government debt (JGBs) from domestic investors as soon as 2015. They will have to print money instead. They can’t afford to let bond yields rise because JGBs already make up 25pc of bank balance sheets. A rise in yields would set off a crisis.”
Data: Federal Reserve’s most recent Flow of Funds report (Table L.108, pdf page 83, line 1, “Total financial assets”), plus the Fed’s historic yearly data on the same series going back to 1945.
The chart shows the five-year growth rate in the Fed’s financial assets since 1950. And it demonstrates the incredible, unmistakable, inexcusable expansion of the Fed’s role — in three distinct eras:
Era of monetary stability (1950 – 1963): On average, the Fed grew its financial assets by only 3.4%every five years.
Result: Inflation and interest rates were very tame. Any speculative bubbles and busts were limited to niche sectors. Recessions were relatively mild. And the U.S. dollar was king in the global economy.
Era of monetary expansion (1964 – 2007): The Fed began expanding its balance sheet at a rapid pace — by an average of 37.2% every five years, or ELEVEN times faster than in the prior era of monetary stability!
Result: Inflation surged and interest rates went through the roof. Moreover, toward the end of the period, two boom-bust cycles and the worst recession since the Great Depression nearly destroyed America’s middle class. The U.S. dollar fell precipitously and America’s global leadership became a shadow of its former self.
Era of monetary EXPLOSION (2008 – present): Chairman Ben Bernanke, true to his nickname “Helicopter Ben,” has expanded the Fed’s financial assets at an average five-year clip of 194.9%!
That is now FIFTY-SEVEN times faster than the pace of growth recorded during the era of monetary stability!
Result: Unknown and unimaginable.
European Central Bank’s QE2 Is Far Larger Than Its QE1!
Bank of England Bloats Its Balance Sheet 4.3 Times Over!
IMF efforts to intervene in the global currency war just struck out, according to breaking news from the AP.
The annual meeting in DC ended with no compromise or resolution, only a communique that pledged to “deepen” its work in the area of currency movements, including conducting studies on the issue.
This note essentially papered-over sharp differences between China and the US, according to the AP.
Here are some of the punches thrown earlier:
- China’s Xinhua accused the US of being the currency manipulator and threatening the global recovery
- Canada’s finance minister said China’s policy was “dangerous because it leads to a crescendo of activities that are protectionist“
- And last night, Brazil’s finance minister repeated warnings of a global currency war.
1930s again? WTO official warns of rising protectionism, trade barriers is greater today than it was even in 2008-2009
WTO official warns of rising protectionism
SINGAPORE–The head of the World Trade Organization warned Friday that protectionist measures are on the rise around the world, after the Geneva-based group said world trade will grow more slowly in 2012 than predicted earlier this year.
“I remain convinced that this recovery will be slow,” WTO Director-General Pascal Lamy told a business group. He said the pressure to throw up trade barriers is greater today than it was even in 2008-2009, in the immediate aftermath of the financial crisis.
The WTO earlier Friday slashed its forecast for growth in global trade in 2012 to 2.5% from 3.7%, citing global headwinds including anemic U.S. growth and China’s slowdown.
During the Great Depression of the 1930s, most countries abandoned the gold standard, resulting in currencies that no longer had intrinsic value. With widespread high unemployment, devaluations became common. Effectively, nations were competing to export unemployment, a policy that has frequently been described as “beggar thy neighbour“. However, because the effects of a devaluation would soon be counteracted by a corresponding devaluation by trading partners, few nations would gain an enduring advantage. On the other hand, the fluctuations in exchange rates were often harmful for international traders, and global trade declined sharply as a result, hurting all economies.
The exact starting date of the 1930s currency war is open to debate. The three principal parties were Great Britain, France, and the United States. For most of the 1920s the three generally had coinciding interests, both the US and France supported Britain’s efforts to raise Sterling’s value against market forces. Collaboration was aided by strong personal friendships among the nations’ central bankers, especially between Britain’s Montagu Norman and America’s Benjamin Strong until the latter’s early death in 1928. Soon after the Wall Street Crash of 1929, France lost faith in Sterling as a source of value and begun selling it heavily on the markets. From Britain’s perspective both France and the US were no longer playing by the rules of the gold standard. Instead of allowing gold inflows to increase their money supplies (which would have expanded those economies but reduced their trade surpluses) France and the US began sterilising the inflows, building up hoards of gold. These factors contributed to the Sterling crises of 1931; in September of that year Great Britain substantially devalued and took the pound off the gold standard. For several years after this global trade was disrupted by competitive devaluation. The currency war of the 1930s is generally considered to have ended with the Tripartite monetary agreement of 1936.