For those keeping track of currency wars around the globe, 2015 – a year in which two central banks, those of Switzerland and Singapore have already admitted defeat, is shaping up as nothing short of historic. As DB’s summarizes: just about 31 countries have, in less than a month, eased in the form of 13 mostly “surprise” rate cuts, while just 5 have tightened monetary policy.
We are in global depression which started in 2007 and is going to continue indefinitely, Jim Rickards, economist and author of “Currency Wars: The Making of the Next Global Crisis,” told RT.
China’s central bank is injecting a combined 500 billion Yuan into the country’s top banks – a move signaling the deep concerns of an economic slowdown in China. A downturn in China`s economy, as investment is scaled back in Chinese real estate, has prompted economists to forecast further financial defaults and slowing economic growth in the second half of the year. Will this monetary easing fix China’s short-term problem and put it back on the path to prosperity in the long-term? Erin from “Boom Bust” asked economist, Jim Rickards, in her show.
Exactly 70 years ago to the day, hundreds of delegates from 44 nations were busy at work in Bretton Woods, New Hampshire creating a brand new financial system.
World War II had just ended. Europe was in ruin.
And since the US was simultaneously the largest economy in the world, the primary victor in the war, and the only major power with its productive capacity intact, it was easy to dictate terms: the dollar would dominate the new system.
Every nation would hold dollars as the primary reserve currency, and the dollar would be redeemable for gold at $35/ounce.
China has stepped its war on Bitcoin up a notch, shutting down two trading platforms. Fear of the crypto-currency in the country has been intensifying, with concerns that it is being used for money laundering and evading currency controls.
China Guangfa Bank and Shanghai Pudong Development Bank Co Ltd stated on Thursday that they had banned customers from using accounts to trade Bitcoins.
According to a Wednesday Wall Street Journal report, China’s central bank summoned executives to encourage them to put a stop to all Bitcoin-related business and tighten monitors on its trade.
Jim Rogers hope-driven wish is that the politicians were smart enough at some point to say (to the central bankers), “we’ve got to stop this, this is going to be bad.” He adds, on the incoming QEeen, “she’s not going to stop it, first of all she doesn’t believe in stopping it, she thinks printing money is good.” However, Rogers warns in this excellent interview with Birch Gold, “eventually the markets will just say, “We’re not going to play this game anymore”, and we’ll have a serious collapse.” The world is blinded by central bank liquidity, and as Rogers somewhat mockingly notes “if everybody says the sky is blue, I urge you to look out the window and see if it’s blue because I have found that most people won’t even bother to look out the window…” Rogers concludes, “everybody should own some precious metals as an insurance policy,” because as he ominously warns, when ‘it’ collapses, “there will be big change.
Rachel Mills, Birch Gold Group (BGG): This is Rachel Mills for Birch Gold, and I am very pleased to be joined today by Jim Rogers, legendary investor. Thank you so much Jim for joining me.
Jim Rogers: I am delighted to be here Rachel.
BGG: So today I wanted to talk a little about stock market highs and Quantitative Easing and inflation and a little bit of Federal Reserve and when is the taper is going to happen and currency wars. But there is one question that I don’t have to ask you, which you get asked a lot, I know, and that is what your secret to being so prescient in the marketplace?
“…if everybody says the sky is blue, I at least urge you to go and look out the window and see if it’s blue because I have found that most people won’t even bother to look out the window…”
JR: As far as I know, I’m not quite sure. I do know that I have learned over the years, always, when nearly everybody is thinking the same way that means somebody’s not thinking that means we got to start thinking about it and see if there’s not another way, another approach. Because if everybody says the sky is blue, I at least urge you to go and look out the window and see if it’s blue because I have found that most people won’t even bother to look out the window. If they see on the television or in the newspaper or something that everybody says the sky is blue, I at least urge them to look out the window. I find that most people don’t want to do their homework, that’s the first problem that many people have, is just doing simple homework.
“…no matter what we all know today, it’s not going to be true in 10 or 15 years…”
Canadian billionaire businessman Ned Goodman predicts the end of the U.S. Dollar as the world’s reserve currency. He predicts the transition out of the U.S. Dollar will become, “…quite ugly.” He delivered the lecture at Cambridge House’s Toronto Resource Investment Conference 2013 on Thursday, September 12, 2013.
Following the most recent shift ‘away’ from a USD-centric world (with the China-Australia direct currency convertibility), it seems the possibility of China’s Yuan as the next global reserve currency is getting closer. The Brits, Germans, and now the Swiss (who just signed a free-trade-agreement with China) are all actively vying to become Europe’s Yuan trading hub as it seems the long line of developments to internationalize the currency over the past two years. As Bundesbank board member Joachim Nagel noted in a speech entitled “Reniminbi as a potential reserve currency” this week, “the Chinese currency is well on its way to becoming one of the future global reserve currencies.” He noted that, although the USD is still the most commonly-used currency for settling trade with China; from virtually zero in 2010, the Yuan is used to settle over 12% of trading transactions now – and is likley to increase further.
What in the world is China up to? Why are the Chinese hoarding so much gold? Does China plan to back the yuan with gold and turn it into a global reserve currency? Could it be possible that China actually intends for the yuan to eventually replace the U.S. dollar as the primary reserve currency of the planet? Most people in the western world assume that China just wants a “seat at the table” and is content to let the United States run the show. But that isn’t the case at all. The truth is that China doesn’t just want to compete with the United States. Rather, China actually plans to replace the United States as the dominant economic power on the planet. In fact, China already accounts for more global trade than the United States does. So what would happen one day if China announced that it was backing the yuan with gold and that it would no longer be using the U.S. dollar in international trade? It would cause a financial shift so cataclysmic that it is hard to even imagine. Most of those that write about the “death of the U.S. dollar” usually fail to point out that China is holding a lot of the cards as far as the fate of the dollar is concerned. China owns about a trillion dollars of our debt, China is the second largest economy on the planet, and nobody uses the dollar in international trade more than China does except for the United States. Up until now, China has had to use the U.S. dollar in international trade because there has not been an attractive alternative. But a gold-backed yuan would change all of that very rapidly.
And without a doubt, the Chinese government has already been very busy promoting the use of the yuan in international trade. In a recent note, John McCormick of RBS Group stated the following…
Financial crises in the US and Europe mean the world needs a new, more stable global reserve currency, and trade in RMB is growing rapidly. In the FX market, for example, our figures show that volumes are now worth around USD 5-6 billion daily – double what they were a year ago.
A number of factors suggest that the Chinese authorities want to make RMB internationalisation happen by 2015.
For China, having a global reserve currency is not just about economics. It is also about power.
Just in case Lagarde (and everyone else except for the Germans, who have a very unpleasant habit of telling the truth), was lying about that whole “no currency war” thing, China is already one step ahead and is fully prepared to roll out its own FX army. According to China Times, “China is fully prepared for a looming currency war should it, though “avoidable,” really happen, said China’s central bank deputy governor Yi Gang late Friday.” We look forward to the female head of the IMF explaining how China is obviously confused and that it is not currency war when one crushes their currency to promote “economic goals.” Of course, that same organization may want to read “Zero Sum for Absolute Idiots” because in this globalized economy any attempt to promote demand (by an end consumer who has no incremental income and stagnant cash flow) through currency debasement has no impact when everyone does it. But then again, this is the IMF – the same organization that declared Europe fixed in 2009, 2010, 2011, 2012, 2013 and so on.
Sterling is likely to be the next major currency that depreciates strongly, says Mansoor Mohi-uddin, Head of Foreign Exchange Strategy at UBS Macro Research.
“As central banks tolerate higher levels of inflation, the pound is set to weaken further across the board particularly against our favourite G4 currency, the US dollar” Mr. Mohi-uddin adds.
He concludes: “The GBP seems clearly at risk of following the yen and suffering the next large scale devaluation. As a result, we issued a recommendation that clients buy a six-month sterling put/US dollar call option with a strike of 1.4800.”
First of all, what people think they know about past currency wars isn’t actually true. Everyone uses some combination phrase like “protectionism and competitive devaluation” to describe the supposed vicious circle of the 1930s, but as Barry Eichengreen has pointed out many times, these really don’t go together. If country A and country B engage in a tit-for-tat of tariffs, the end result is restricted trade; if they each try to push their currency down, the end result is at worst to leave everyone back where they started.
And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930s this was because countries threw off their golden fetters — they left the gold standard and this freed them to pursue expansionary monetary policies. Today that’s not the issue; but what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct.
There is a serious intellectual error here, typical of much of the recent discussion of this issue. A currency war is by definitiona low-level form of a trade war because currencies are internationally traded commodities. The intent (and there is much circumstantial evidence to suggest that Japan at least is acting with mercantilist intent, but that is another story for another day) is not relevant — currency depreciation is currency depreciation and still has the same effects on creditors and trade partners, whatever the claimed intent.
It will not come as a surprise to anyone who has spent more than a few cursory minutes reading ZeroHedge over the past few years (back in 2009, then 2010, and most recently here, and here) but the rolling ‘beggar thy neighbor’ currency strategies of world central banks are gathering pace. To wit, Bloomberg reports that energy-bound Russia’s central bank chief appears to have broken ranks warning that “the world is on the brink of a fresh ‘currency war’.” With Japan openly (and actively) verbally intervening to depress the JPY and now Juncker’s “dangerously high” comments on the EUR yesterday, it appears 2013 will be the year when the G-20 finance ministers (who agreed to ‘refrain from competitive devaluation of currencies’ in 2009) tear up their promises and get active. Rhetoric is on the rise with the Bank of Korea threatening “an active response”, Russia now suggesting reciprocal devaluations will occur (and hurt the global economy) as RBA Governor noted that there is “a degree of disquiet in the global policy-making community.” Critically BoE Governor Mervyn King has suggested what only conspiracists have offered before: “we’ll see the growth of actively managed exchange rates,” and sure enough where FX rates go so stocks will nominally follow (see JPY vs TOPIX and CHF vs SMI recently).