Trump Tweetstorm
Currency Wars
The market seems to fear currency wars. At least that is how mainstream media views things.
Actually, currency wars have been going on for decades disguised in other forms.
Currency Manipulation Means
- Direct Currency Intervention
- ZIRP and NIRP
- Quantitative Easing
ZIRP stand for Zero Interest Rate Policy. It younger brother is NIRP, Negative Interest Rate Policy. Their parent is central bank interest rate policy which tends to be asymmetrical in favor of easing over tightening.
All three methods are means in which central banks engage in currency wars. Yet, only point point number one is widely recognized as such.
War Raging for Decades
Properly understood, currency wars have been raging nonstop for decades.
Continuous trade wars go back to August 15, 1971. That’s when Nixon closed the gold window allowing central banks to print money at will and governments to spend at will with no effective brakes other than inflation.
Total Credit Market Debt Owed (TCMDO) now stands over $72 trillion dollars.
Nonstop Inflation
Inflation has been nonstop, and much higher than reported because governments and economists do not see asset bubbles, inducing housing bubbles as inflation.
The result is the third major bubble since 1999.
Trump Accuses China of Currency Manipulation
Trump is correct.
China directly manipulates its currency. So does the Swiss national Bank and so has the Bank of Japan.
Indirect Manipulation
Indirectly the Fed sought a cheaper US dollar with ZIRP and QE policies which the EU soon followed.
The EU is now the global leader in NIRP and QE.
Yaun Manipulation
China does not allow the yuan to float.
The yuan may be hugely overvalued and could crash if China actually floated it. Chinese State Owned Enterprises (SOEs) are all bankrupt, and Chinese banks are in worse shape than US banks.
Periodically, China has artificially strengthened the yuan and capital controls to stop capital flight.
So what would happen if China simultaneously floated the yuan and stopped capital controls? A crash perhaps?
If so, Trump would get the opposite response that he wants.
Global Currency Wars
The important point is not Yuan manipulation per say, but a major step up in currency wars led by the EU and China.
Trump wants the US to join the party.
The Fed will do just that, forced by Trump’s tariff policy and actions by the ECB.
How to Stop the Wars
Stopping the currency wars (and trade wars at the same time) is easy enough in theory. Revert to the gold standard.
But expect the opposite: More financial repression and more NIRP led by the EU and Japan with Trump pressuring the Fed to follow.
Gold vs Faith in Central Banks
Got Gold?
If you believe faith in central banks has peaked this cycle, acting on that belief should be easy.
Meanwhile, please note that a Global Manufacturing Recession Has Started.
The trade war escalation will make matters far worse.
Recession is at hand.
Mike “Mish” Shedlock
PMs maybe, but not gold, silver, perhaps. They confiscated gold at $20 per ounce and then immediately repriced it at $35 while outlawing private ownership. What makes you think that will not happen again? Besides, the ratio of silver mined to gold is just about 9:1. The current price ratio is 89.5:1. Also in a post collapse environment where fiat is no good and PMs are the only way to survive NOBODY will have change for a one ounce gold coin, unless you are buying acreage anyway.
But, Gresham’s law, bad money drives out good. The smart survivor of the future dystopian world imagined here will have some of both “bad” money and “good.” Remember, the colonies were in a depression because England starved them of cash, so they came up with the idea of printing their own scrip which lubricated the wheels of commerce. The 13 colonies were starting to look more prosperous than England so King George cracked down on it, had it destroyed, because he could not tax this under the table scrip, he made it a capital offense to issue or use it. Had he not done that we might never have declared independence.
For America to complain about currency manipulation is like a kid on a see-saw complaining that the person on the other end is manipulating the balance.
Healthy pullback! Imagine how Chinese people feel about devaluation, no wonder they buy gold en-mass, apartments, anything tangible, etc., more than India, and lol, now India buys more silver coin/bar than the U.S. We are still just one planet.
Close to pushing every territory into a depression.
“Stopping the currency wars (and trade wars at the same time) is easy enough in theory. Revert to the gold standard.”
Easy in theory. Completely and utterly impossible in reality.
“Easy in theory. Completely and utterly impossible in reality.”
As things sit now – yes – and likely for a long time, too
The Jihadis seem to have figured it out. One could perhaps hope there would exist other solutions than theirs. But at least any solution is better than no solution.
There is no short term solution to the China trade dispute. Picture kids sitting in a fuel tank negotiating fire prevention tactics and strategy. Trump just struck a tariff match to provide more light on a subject that’s been festering since the dawn of the Deng era, 1979…
I think a severe recession, 50% market roll-off and three years should bring us back to where we are…nowhere without the Gold standard. Politicians just can’t help themselves.
Every country see’s its currency as a mean of cheapening its export and increasing the price of import, at heart politicians are mercantilist and there’s really not much more to say than that.
I think that China is “holding up” its currency because, worse than Japan, so many of its companies are “zombies” requiring more and more borrowing to meet their expenses.
Mish, it has been said that only one country every wanted a strong currency — the Americans — the strong US dollar allowed America’s imperialist ambitions to flourish. Now all that is getting in the way of a mercantilist President!
I cannot remember from my history lessons but I think the UK had similar policies prior to WW1 (but I could be wrong on that one); economic history was a long time ago!
“Every country see’s its currency as a mean of cheapening its export and increasing the price of import,”
More accurately, every Privileged Ruling Class, sees debasing the currency as a way to make their designated underlings do more work for less money. Trade balances is just a side effect.
“Countries” are regions on maps. They don’t “see” nor decide anything. Individual People do. And the people who make debasement decisions, are invariably privileged twits. Living off of value add produced by those whose pay is reduced by the debasement.
Headline: “Trump no officially accuses China ” should read “NOW” not “no”. And yes I got gold! And SLV!
Thanks Ray
That was supposed to be “now” but I removed it from “no”
“Trump is correct.
China directly manipulates its currency. “
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Yep. Just calling a spade a spade.
Have to laugh thinking back on Tim Geithner. During his confirmation hearing (Jan 2009) got asked the litmus test question of whether China manipulating. Answered: affirmative. Well. lo and behold, “they” told him how things work. When hearing continued later he had pulled a 180 – no manipulation.
“Trump is correct.
China directly manipulates its currency. ”
But are you aware that if they did not it would crash…
Now? Yes.
Then? No. Yuan much stronger, before they quintupled debt.
I have not doubt that the yuan would crash if China were to let it float on its own. I mean really would you rather hold $$ or yuan?
Also and I have not found anyone who can tell me of any trade war in history that ends well to all involved. They all end the same way either economic misery or real war.
I still remember the crazy accusing Obama of being the Antichrist and that the end was near… Guess they missed by one LOL
In the end we are headed for more deflation because of a capital crunch and currency devaluations. I don’t think the gold standard is the answer either. Deflation will help more people than it hurts but in the end it will end in tears for many too because unemployment will rise significantly.
Read the transcript of Nixon’s August 1, 1971 speech. He explicitly states that the US is “TEMPORARILY” suspending convertibility of the Dollar to Gold. They can re-instate it at any time, at any level and claim they are keeping their word. Convertibility at $10,000/oz would immediately create a huge jump in the general price level and reduce public and private debt burdens accordingly. The Fed has been trying to create this kind of inflation via monetary policy and it hasn’t worked and will never work. If you think they are going to allow a deflationary depression to happen, you are sorely mistaken.
“If you think they are going to allow a deflationary depression to happen, you are sorely mistaken.”
…
Well, they have tried to get inflation for 10 years and all they got was a massive asset bubble about to pop. The debt overhang precludes any sustained inflation. Until there is a jubilee of sorts for debt – and risk weimar – I’m not seeing it.
Gold re-valuation is the only way out. Negative interest rates, when we are running $3/4 Trillion annual trade deficits every year will start WWIII. Gold re-valuation does not result in a Weimar-style inflation because the Dollar is pegged and convertible to Gold. And it is a “Debt Jubilee” (of sorts).
Still not seeing it.
Bottom 80% hold little/no gold … but plenty of debt.
Try again.
Yes, no gold but plenty of debt, most of which will be instantly inflated away.
How exactly?
Re-valuing Gold to $20,000+/oz (and re-instating convertibility for foreign creditors) is a de-facto USD de-valuation. The general price level will rise accordingly, as will wages. Debt burdens shrink greatly. Similar to 1933, only bigger this time.
Nope.
Until you get $$s in the hands of the bottom 80% … or renounce their debt (jubilee) you have accomplished NOTHING. Preaching revaluation of gold over and over (as bringing some sort of salvation) … Does not change the fact at hand.
Gold bugz can never figure this out.
MMT puts worthless $ in the hands of those 80% and starts WWIII to boot. Re-valuation and re-convertibility of Gold is the only way forward. Painful for those with cash savings and no debt, but that is a minority at this point.
You make a common mistake when it comes to understanding inflation. You talk of inflation as if it were ‘the general price level’. No such thing exists. In a credit bust you typically get deflation in the very assets that were inflated in the credit boom i.e. real estate and financial assets. The price of a can of baked beans does not respond in the same way.
In fact, I would argue that groceries and other life necessities are more vulnerable to inflation in a credit bust because financial difficulties for consumer businesses mean capacity is potentially taken out.
Inflation is a function of fluctuations in the money supply and, in order for the debt-based money system to survive, the money supply really needs to increase on a perpetual basis. Which is why, when there’s a bust, the central bank steps in to take over the money creation process. It’s a fine balance but one day the authorities will press too hard on the monetary gas and faith in the un-backed paper they call legal tender will be tested.
“The price of a can of baked beans does not respond in the same way.”
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Oh, yes it will. Demand will crater across the board, not just in inflated assets. If consumers feel poorer (and they will), they will pull back wherever and whenever they can. Return of Victory Gardens in your case. Good luck raising prices of baked beans in that environment.
not gone happen. The day US goes back to the gold standard that is the day you need ammo more than gold. just saying
Tony Bennett has this correct
The Fed did not prevent a deflationary collapse in 2008 it sowed the seeds for one and did so again
Exactly. Deflation can also happen when more debt has to be paid back then income has to pay it back.
How is a currency devaluation deflationary?
No, we will get deflation when the debt is paid down or defaulted on. Money supply=monetary base+outstanding debt. Inflation is increase in money supply relative to production, and deflation is decrease in money supply relative to production. The “relative to” part is what everyone seems to ignore. If debt goes up thus increasing the money supply but production also goes up, no inflation. But now we have a ton of debt and ppl like lizzy warren are talking about writing off trillions. That is a reduction in the money supply. And if the money supply falls when the production is flat, that is deflation.
A gold standard works simply because the amount of gold is fairly stable, well known and predictable. Which is all that is required of a currency. There’s no magic to money. It’s just a measuring stick, allowing people to compare values of real goods across time and space. The more reliably stable supply is, the better. ANY deviation from stabilty, is a detriment. Just like, as in no different at all, it wrt with measures of length, mass, time etc. Pretending there are benefits to manipulating the amount of currency in circulation, is, literally, as completely idiotic as pretending one can make people bigger by arbitrarily shortening the official meter. Literally that stupid.
Correct Sechel