Saturday, November 22, 2014

Japan vs. China vs. Europe - Stock Car Race to Devalue?

A few years ago Jim Rickards came out with his book "Currency Wars" which talked about countries engaging in a race to devalue their own currencies to try and pump up sagging domestic economies. As things have unfolded, the currency wars have indeed been intense. 

We can kind of think of all these massive QE and stimulus programs like a NASCAR(R) race to see who can devalue their currency the fastest. Right now the US has pulled in for a pit stop, but Japan, China, and the EU are still fighting it out on the track. The three articles linked below talk about it. 


"So-called Abenomics involves a 'three arrow' approach - a big government spending package, the targeting of a 2 per cent inflation rate through a massive money printing scheme, and a program of business reforms.'

"But early signs of a return to economic health appear to have been scuppered by a premature hike in VAT from 5 per cent to 8 per cent last April. So last Friday, the Bank of Japan announced it was pumping even more emergency cash into the economy, by cranking up money printing to Y80trillion (£450billion) a year from Y60-70trillion."

"China cut interest rates unexpectedly on Friday, stepping up a campaign to prop up growth in the world's second-largest economy as it heads toward its slowest growth in nearly a quarter century."
"The cut—the first such move in over two years—came as factory growth has stalled and the property market, long a pillar of growth, has remained weak, dragging on broader activity and curbing demand for everything from furniture to cement and steel."
"The European Central Bank announced Friday that it has started buying asset-backed securities as it attempts to revive its stagnating economy and encourage lending among banks."
"However, some analysts have pointed out that the ECB’s limited quantitative easing strategy will not be enough to support the faltering economy. Focus has now shifted towards whether or not the central bank will implement a full-scale strategy that would include buying various government bonds."
My added comments: If you look at this the way Jim Rickards does, right now the US Fed is losing the race. Despite massive efforts to bring down the US dollar, it has stubbornly held up and strengthened. With the Fed in for a pit stop for now, the dollar will probably fall further behind since the other competitors are fully engaged out on the track and revving up their engines. Based on the reports linked above; Japan looks like they are "winning" for now, China is behind them, and the EU is lagging (but might add some higher octane fuel to try and get a turbo boost). With Latin America's economy weakening, will they join the race?
If Jim Rickards is right, by early next year the Fed will be forced out of pit row and back onto to the track. He says the weak growth in the US will falter even more and recession comes back. Solution? Get back out there into the race to devalue with new tires, a full tank, and renewed determination. A question for the spectators might be: How many more laps is this race going to last? A question for the drivers might be: If I win this race, will my grand prize money have any value left to buy me anything? (maybe if it includes a gold cup).
Let's hope all this does not result is a multi car crash on the track with all the competing currencies going up in flames. Just like in a stock car race, a crash involving one car can end up involving a whole bunch of other cars in a chain reaction. And the spectators (us) are also likely to get hurt as well.

Added notes:   Here is an interesting opinion piece by Charles Hugh Smith on this topic.

And here is David Stockman's take on this. He sounds like Jim Rickards. Here is a quote:

"In short, there is a tidal wave of industrial deflation coming down the pike—- owing to two decades of world-wide central bank financial repression that has fueled vast malinvestments in mining, manufacturing, transportation and trade. That, in turn, will trigger a monetary race to the bottom by the central banks—a race that is already underway owing to Japan’s Halloween Massacre of the yen. Soon the rest of East Asia—and especially China— will have to join the exchange rate plunge or find their export based economies hitting the shoals."

Also the Wall Street Journal chimes in: Bring on the Currency Wars

(R) NASCAR is a registered trademark of the National Association for Stock Car Auto Racing

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