people in motion

people in motion

lundi 11 mars 2013

Currency war

Presenting The Currence Crises, Devaluations And Regime Changes Since The Collapse Of The Gold Standard

“‘Devaluing a currency,’ one senior Federal Reserve official once told me, ‘is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess.’”
—Francesco Guerrera, The Wall Street Journal, 4 Feb 2013.

One of the often repeated "truisms" of modern economics, is that the advent of central banking, and the end of the gold standard ushered in a far more stable, safe and secure financial system. Facts notwithstanding (because hard as we try, we can't find a historic episode where the entire developed world had to coordinate to fund, guarantee and backstop a $30+ trillion global bail out - using even more money created out of thin air, i.e., debt - to prevent the nearly $1 quadrillion derivative complex from collapsing, not to mention the failure of every single modern financial institution, during the gold standard), the reality is just slightly different.
The U.S. Federal Reserve has already tried twice in 2000 (chaired by Greenspan) and 2007 (chaired by Bernanke) to create a bubble of shares through ultra loose monetary policy and has failed miserably since this resulted in two stock market crashes that have ruined many people and institutions. We are at the third attempt, the probability calculation shows that there is a good chance it ends in a crisis much stronger than the first two fiscal imbalances, the public and private debt and the creation counterfeit currency by that central bank is much larger than in 2000 and 2007. So true is it that ultra laxist monetary policies are only able to create bubbles temporary financial assets that have ALWAYS eventually bursts much worse than they had been able to create illusions initially.
Everything indicates that the size of the next crash will be unmatched and central banks, which are most of them already insolvent because their bloated balance sheets are no longer composed only of rotten assets (or their having been largely sold rented or covertly) will then simply double bankruptcy collapse fake paper money they print without any restraint and bonds hyper-indebted they buy on tap.
In other words, the financial economy is in an inflationary bubble while the real economy is almost in deflation (killed by the tax increases needed to pay public debts) in the U.S. and euro area and Japan. A cocktail that has never allowed the history to recreate sustainable growth and effective  employment, especially in open economies subject to destructive globalization distorted by generalized competitive devaluations (the "currency war" ). 

As the following table from Bloomberg's Joseph Brusuelas shows, modern "stabilty" is certainly in the eye of the beholder, in this case manifesting itself in countless periods of uni- and multi-lateral currency devaluation, beggar thy neighbor, and currency, trade, and various other types of war.
Here is Brusuelas' personal take on the past 80 years of "stable" central banking and floating exchange rate history:
Tensions between policymakers due to volatility in foreign-exchange markets pale in comparison to those induced by the policies of the Great Depression. That period saw tariff and non-tariff barriers imposed by countries attempting to arrest the economic slide that characterized the global economy in 1929-1939. The coordination between the large global central banks that are engaging in competitive QE has avoided the outbreak of protectionism that was observed during the 1930s. In Thucydides’ History of the Peloponnesian War, he stated: “The strong do what they can and the weak suffer what they must.” As the large central banks attempt to boost their economies via QE, small and developing countries will likely have to  adjust by accepting faster inflation or accommodate to these policy changes by accepting currency appreciation.
Currency warfare summary table:
Keep an eye on the 2007-??? line item. If history is any indication, what follows next will hardly be pleasant for anyone involved
See also   Currency Farce

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