The First Casualty of the Currency Wars

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Your editor’s Kindle e-reader has become the first casualty of the currency wars. We did the old ‘put it on the roof of your car and then forget about it’ trick. What does that have to do with currency wars? Well, that’s the name of the book we couldn’t put down at the time – Currency Wars by James Rickards.

So if you found a white Kindle in Noosa’s main beach car park, please return it to:

Port Phillip Publishing
Attn: Nick Hubble

PO Box 899
Braeside
VIC 3195

Our Kindle may have been the first casualty. But it won’t be the last. Australia’s car industry is all over the papers and the news. It’s struggling with the strong Australian dollar. Clive Matthew-Wilson, editor of the car review website dogandlemon.com told the BBC that ‘Australia’s car assembly industry loses money on every vehicle it assembles. That harsh economic fact spells absolutely inevitable doom.’

We presume Australia’s other less newsworthy export industries are struggling too. Can Australia’s currency continue its rampage while exporters burn?

Over in Canberra, there’s plenty of confusion about where the Aussie dollar could go. According to the Australian Financial Review, Manufacturing Minister (a job title worthy of a George Orwell book) Kim Carr reckons the car industry will be fine when the Aussie dollar falls back to 90 cents. But Treasury economist (another suspicious job title) Dr Gruen reckons it will keep going up.

If the Aussie dollar does keep rising, will Australia’s movers and shakers do some moving and shaking to weaken it in the name of national prosperity? Will Australia join in the currency wars with a volley of its own cash to shoot down the exchange rate?

Well, it sort of already is. You see, every time Glenn Stevens of Reserve Bank Governorship lowers interest rates, he does so in much the same way that currency war broadsides are fired. He creates new money, or releases money that wasn’t previously circulating in the economy. That addition of funds doesn’t just make borrowing cheaper. It also makes the Aussie dollar more plentiful relative to other currencies.

Of course, there is another ‘relative’ to keep in mind here. If other central banks are outpacing the RBA’s efforts, the Aussie could stay sky high in terms of other currencies. So, unless Glenn Stevens is willing to really fire up the Australian printing presses, he won’t be able to counter the high Aussie dollar.

That leaves politicians Julia and Tony to cause trouble. Probably with tariffs and subsidies. Surprise, surprise, those are already in place too. Especially for the controversial car industry. Yes, the currency wars have been going on quietly here at home for some time now. And going by the state of our exporters, we’re losing.

What’s worrying is that the global tide of currency flows has pushed Australia up a creek. We didn’t get to $1.07 USD per Aussie dollar by paddling there ourselves. We got there on a surge of printed US dollars, euros, pounds, yen and Swiss francs. When the tide turns, we’ll be just as much at its mercy as we were on the way up. In other words, the Aussie dollar could tank anyway. Regardless of what the RBA and politicians come up with.

Exporters won’t like a falling dollar environment any more than the current one. That’s because it will probably be accompanied by a re-run of 2008’s economic weakness. Or worse.

The Other Half of the Money Manipulation Machination

Apart from the fact that it might not work for Australia, there is a conceptual problem with currency manipulation. The gains from more exports are offset by the losses of others in the economy. That’s a solid dose of the obvious that’s never fully occurred to those who see currencies as a weapon. And it comes from Encima Global president David Malpass. Although his quote discusses the issue from the US perspective, with the US central bank as the culprit, the story is the same:

‘Dollar weakness doesn’t work at all for economic well-being. The corollary to the Fed’s policy of manipulating interest rates downward at the expense of savers is declining median incomes. When the currency weakens, the prices of staples rise faster than wages, hurting all but the rich who buy protection.’

In other words, currency manipulation is not beneficial to the economy as a whole. It’s nothing but a shameful redistribution of wealth. Or perhaps shameless. And it just so happens that this manipulation would be at the expense of a growing voting block of Australians – those with accumulated retirement savings.

For every dollar of export benefit from a lower Australian dollar, how much are those holding dollars losing? How much will their cost of living rise? How much return will they lose on savings accounts as interest rates fall?

Savers in Europe and the US have been stung badly by currency war policies there. And, apart from in Germany, there doesn’t seem to be much of an export boom despite a plunging euro. (We’ve done our bit by buying Greek olives.) So does the policy of printing money to lower your currency work at all?

It definitely has various other effects. They outweigh any export benefit in our opinion.

But don’t worry too much about all these worldly concerns. Our friends at the following institutions are working hard to solve the problems:

International Monetary Fund, European Parliament, European Commission, World Bank, Bank of International Settlements, European Central Bank, Bundesbank, Reserve Bank of Australia, Bank of England, Federal Reserve, European Financial Stability Fund, Australian Prudential Regulation Authority, Australian Securities and Investments Commission, Financial Services Authority, Securities and Exchange Commission, Federal Deposit Insurance Corporation, International Swaps and Derivatives Association, Institute of International Finance, Financial Industry Regulatory Authority, World Trade Organisation, Organisation for Economic Cooperation and Development, Committee of European Securities Regulators , the Committee of European Banking Supervisors the Committee of European Insurance and Occupational Pensions Supervisors, the International Organization of Securities Commissions, the Basel Committee on Banking Supervision and, our personal favourite, the Plunge Protection Team.

What could possibly go wrong?

Iran’s Solution to Western Meddling Is Your Solution

We prefer to answer a different question to ‘what could go wrong?’ Instead, ‘what could go well when things go wrong?’ And we’ve found something. In fact, it could go gangbusters. The gold price is a barometer of monetary instability. Or irresponsibility if you prefer. And there is plenty of that going around.

While central bankers are busy trashing their currency, why not own the ‘anti-currency’?

Jim Rickards, author of Currency Wars, which we were reading when our Kindle took a tumble, suggests as much in this interview. King World News gave it the transparent title of ‘GOLD MAY SUPER SPIKE on PANIC BUYING as WE SEE the END of the DOLLAR & MUCH MORE’.

You can guess what most of the interview was about. But the second half took us by surprise. If you think currency wars are an abstract concept impacting you only indirectly, or only directly if you work in an export industry, consider these comments from Rickards:

What we saw this week is actual financial war. A couple of weeks ago the President announced sanctions on the central bank of Iran… They told all the other banks in the world, if you do business with [the Iranian Central bank] you cannot do business in the United States…. So they cut the [Iranian Central bank] out of the dollar payment system. This caused an immediate shortage of dollars in Iran. The Iranian currency dropped 40% in the course of a couple of days against the dollar. So this injected hyperinflation into the Iranian economy. I don’t think it’s any coincidence that we caused hyperinflation in Iran weeks before the election because that really enrages the population. This is just outright financial warfare.

The next time you see some crackpot dictator blaming political turmoil on insidious outside forces, you might not want to scoff quite as much. They might be idiots, but that doesn’t make them wrong. And they aren’t necessarily dumb either. Iran is one-upping Saddam Hussein’s ‘food for oil’ program with a ‘gold for oil’ deal. India is rumoured to be on the receiving end of the oil.

Rickards continues:

For every action there is a reaction. The US likes to think that we severely damaged Iran by forcing them out of the dollar system. But Iran is saying, in effect, ‘well keep your dollars. We have another payment system called gold.’ [They] don’t need dollars. [They] don’t need the western banking system… This could be the beginning of the end of the dollar.

Is this the beginning of a return to the gold standard? If it is, what do you think that means for the demand for gold? And what will that do to its price?

We’d rather be holding the currency of the future than the past.

Oh, by the way, Rickards’ book isn’t the only Currency Wars out there. The Chinese have their own version with the same title. This from Wikipedia:

The premise of this book is that Western countries are ultimately controlled by a group of private banks, which, according to the book, runs their central banks. This book uses the claim that the Federal Reserve is a private body to support its role. The book’s author correctly predicted a banking crisis in the US in 2008. [The book] is a bestselling book in China, reportedly selling over 200,000 copies and is reportedly being read by many senior level government and business leaders in China.

The Chinese know what’s going on. That’s why they are accumulating gold. At what point will they turn the tables on the US and implement the same currency war strategies the global superpower currently uses for itself?

Until next week,

Nickolai Hubble.
The Daily Reckoning Weekend Edition


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Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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3 Comments on "The First Casualty of the Currency Wars"

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masalai
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Nick,
Interesting essay and seemingly well researched, – – BUT – – One little point… What about adjusting penalty taxes on “carry-trade” funds that do not remain in Australia for more than 180 days . . ??? – been done successfully in S America?

geo
Guest

and as we speak the USS enterprise is entering the persian gulf. Due to be decommissioned next year, this aircraft carrier has 8 reactors, and will cost billions to retire. Or “Iran” could sink it, making Russian or Chinese opposition to US/Israel war with Iran much less likely and enraging the US population, whilst simultaneously making the radioactive mess somebody elses problem.

Anybody who has read the history of Pearl Habour, or the USS Liberty, should be skeptical.

Nathan Chattaway
Guest
Nick, If free market was left to be just that, Australia wouldn’t have had a car manufacturing industry for decades. Instead, we would have made the obvious switch to domestic manufacture of light and heavy rail, road trains, mining infrastructure and cargo ships. When the city of Adelaide wanted to resurrect a small part of the tram network they ripped out in the 1950s (lobbied mercilessly by the car industry manufacturers), they bought trams from Europe. After 1 week on the job, it was very embarrassing for the govt to realise they’d need to beef up the entire airconditioning system… Read more »
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