Sunday, November 15, 2009

Beggar Thy Neighbor

During the Depression, America and Britain became desperate to sell their goods overseas, and so they put up trade barriers so other nations could'nt realistically sell their goods here and they lowered the value of their currencies to make their own exports cheaper; it was a good attempt at trying to export their way out of the Depression. The problem was, other nations followed suit, and there was a huge drop in trade, making the Depression much worse than it needed to be. These policies became known as "beggar thy neighbor".

When a nation's currency goes down in value, they are able to export more because their goods cost less versus a nation's goods who's currency is worth quite a bit. China has achieved a large trade surplus for a good decade (in part) at least because they have held down the value of their currency relative to other currencies.

Currently, the US is printing money like madmen, lowering the cost of our exports. China has kept up the pace for the most part. But for other nations: Japan, Brazil, Euroland.. it has meant that their exports have become more expensive and their exports are beginning to suffer. Here is a chart of the Brazilian currency, the Real: http://futuresource.quote.com/charts/charts.jsp?s=QBR%20Z9 and here is a chart of the US Dollar: http://futuresource.quote.com/charts/charts.jsp?s=DX%20Z9. Here the Brazilian currency has appreciated nearly 50% in the last six months, making their exports much more expensive versus American exports simply because of currency manipulations.

President Obama is currently in China for talks with their leaders; we are pushing for them to raise the value of their currency; they are doing the same with us. Obama was also in Tokyo, where the discussion was much the same, though the Yen has been rising for much of the year.

The danger is that other nations (especially Japan) will begin to crank up the printing presses as well. The Japanese Gov't will need to borrow $500 billion next year, and their savings rate is at 2%, half what it is in America... in other words, the Japanese people are tapped out. For them to borrow that much money (probably half the total) from other nations is a stretch, and their interest rates could concievably rise to attract these foreign buyers. What to do ?? Copy Ben Bernanke, who printed up nearly half a trillion dollar bills and "bought" US Gov't bonds.

And herein lies the problem.. at some point, it might become a race to the bottom. As money printing increases, the price we all pay for basic goods increases, though so far this has not yet happened as most of the printed money has found its way into the stock market and bank vaults. Disturbingly, the CRB index (which measures a broad range of commodities) has gone up, possibly portending inflation: http://quotes.ino.com/chart/?s=NYBOT_CR&v=d12. If inflation did begin in the US and goods did become more expensive, don't expect employers to automatically start giving raises. Back in Hooverville, our standard of living will simply decline.

The world economy is still skating on thin ice, and dangerous currency games are the last thing anybody needs.

1 comment:

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