& Market Trends
The Currency War
Posted January 21, 2004
The U.S. is running a "silent
currency war" against the rest of the world by not only
trying to devalue the dollar until the economy begins to grow
on a sustained basis, but until employment starts to grow as
well. As long as the U.S. is dedicated to 5% budget and trade
deficits and 1% short-term interest rates, the fall of the dollar
Our government's policies are
extraordinarily self-indulgent and profligate. The Treasury and
Federal Reserve want to punish savers by continuing to reward
financial speculation, credit creation and spending. Indeed,
there is no better way to punish savers than to offer a 1% interest
rate and a 20% annual drop in the value of the dollar. Moreover,
be assured the Federal Reserve will not raise interest rates
and will continue the limitless flow of credit until there is
enough growth in employment to ensure both the Fed Chairman's
re-appointment, and the President's re-election. Stabilizing
the dollar will be our trading partners' problem.
If any countries wish to bring
sanity and stability to the world currency markets, it will not
be the U.S. It will be up to our trading partners to "act
like adults and say no" to the indulgent child. A falling
dollar looks good and is a stimulant to our economy in the short
run. Foreign cars and other goods become more expensive and less
competitive, helping our domestic industry. U.S. corporations
can bring profits back from overseas (profits in Euros look 30%
better when they are brought home to the US in dollars).
At present, some of the countries
being smashed by the currency war are Europe, the United Kingdom,
Canada, Australia, and South Africa. The countries targeted for
"dollar bombing" have a few things in common: they
have generally sound economic policies, no major trade imbalances,
and a desire to fight inflation. They have not yet "capitulated
to the dollar bombing campaign" and started to buy dollars
to prevent their currencies from rising. While their central
banks already own too many dollar assets and are losing their
taxpayers tens of billions of dollars, they have not signed on
to buy additional endless amounts of dollar assets to hold their
On the other hand, the Japanese
and Chinese appear to have capitulated. They will buy any and
all dollar assets necessary for America to live beyond its means,
but they will do this only as long as we send them our jobs.
In buying dollar assets, foreign central banks help hold interest
rates in the U.S. at artificially low levels. With the size of
our trade and budget deficits and no savings, this country could
not keep its housing, stock market, and consumption bubbles afloat,
if interest rates went up. In this currency war, the Japanese,
Chinese, and the rest of Asia, are "killing us with kindness."
The currency war is being waged
with two alternative goals: Foreign countries should either let
their currencies rise and suffer the loss of jobs to America,
or they should buy U.S. government debt without limit. As long
as Foreign Central banks buy dollars, they are the ones paying
for our war in Iraq, and they are the ones paying for an American
buying a Hummer with a second mortgage.
However, it is becoming clear
that anyone buying U.S. debt is making a horrible investment.
For those foreign countries holding and buying this debt, it
is a major tax on their citizens as the dollar tumbles. America's
profligate spending and currency war is painful for the rest
of the world, particularly for those countries that wish to have
responsible and prudent fiscal and monetary policies.
There is a way out for foreign
countries, but it is not what the U.S. expects or would want
in an election year. Our Federal Reserve is throwing a great
party with easy money and a weak dollar while asking responsible
governments and central banks to suffer our "hangover"
for us. There is no natural law that says that the only thing
foreign central banks can do to take the pressure off their rising
currencies is to create money and buy dollars.
Under the Clinton Presidency,
the genius of Larry Summers was to sell gold to make the dollar
look strong. This policy worked. The reverse will also work.
Responsible central banks that want to help the United States
establish responsible budget, trade and interest rate policies,
should "buy gold not dollars" to make their currencies
"look weak." Moreover, there are any number of things
that foreign central banks and governments can buy with new local
currency that will help hold their currencies down, give the
country something of value, and stop enabling the Federal Reserve
to run a monetary policy fit for a drunken sailor. Countries
should "manage their currencies down against the dollar"
by buying gold and silver, oil and more oil, tin, copper, zinc,
etc. Countries with sounder monetary and economic policies, such
as England, Australia, and Europe, are major oil importers. Now
would be a wonderful time to fight back against the U.S. currency
war by printing up some money to fund a strategic oil reserve.
Countries such as South Africa, Canada, and Australia, should
buy gold, silver and other commodities they produce to manage
their currencies down. This policy is in their clear national
interest because it will build up central bank reserves that
will hold their value and give their miners jobs!
Most countries do not have
as their clear national policy to "steal American jobs."
Therefore, their monetary policy should be one that builds real
financial reserves and gives their citizens something of value
for their money. Only Japan and China have to play America's
dirty currency war and hold the value of their currencies down
by buying dollar assets. Holding dollar assets will cost their
taxpayers a king's ransom because they are the ones who are ending
up with the factories and jobs. All that Americans will be left
with are massive debts and an almost worthless dollar for a currency.
Indeed, the only way foreign
central banks can really help America is to treat the United
States the way friends treat their friends who drink by not letting
them drive drunk. The motto for central bankers should be "Central
Banks Don't Accommodate Financial Suicide."
The problem for the world's
central banks is that irresponsible U.S. budget, trade and monetary
policies threaten the entire monetary system. It will be very
interesting to see what foreign central banks do. World inflation
remains highly likely.
January 18, 2004
Finance Group, LLC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480