Deficits, Dollar, Dubiously Free Trade, Federal Reserve, Game Theory, Individual v. Collective, Live and Learn, Obama Says, Taxes, Treasury, Trust

Currency Wars

The United States has been pressuring the Chinese to let the yuan appreciate for months now. U.S. financial leadership claims that China’s currency is undervalued and, without going as far to say, that they are currency manipulators.

Managing director of the International Monetary Fund, Dominique Strauss-Kahn, recently said “Many [countries] do consider their currency as a weapon, and this is not for the good of the world economy.”

The IMF chief went on to say that many people aren’t “talking about a currency war” but it’s true to say “many do count their currency as a weapon.” So while he’s not prepared to declare an all out currency war just yet, he is talking out of both sides of his mouth.

A weak currency really is all about perspective. In a weak global economy, countries are pumping out dollars to weaken their currency and make their exports more attractive. The Federal Reserve is flat out telling us they are prepared to pump billions more into the economy and continue the assault of monetary easing. The United States calls China a manipulator for devaluing the yuan, while we flood markets with US dollars. Sounds to me like the same pastime. There’s a word for this: hypocritical. The stance by President Obama and Treasury Secretary Timothy Geithner on the yuan really only comes down to the fact that China’s GDP growth is projected to be 10.5% this year, and that they should concede some of that growth to “re-balance” the global economy. Not the most convincing argument.

The dollar hit an eight-month low against the euro and a fifteen-year low against the Japanese yen this week; while gold and silver hit new nominal records on seemingly a daily basis.

I guess it’s fair for investors to ask: is there any riskier an asset to be in than the U.S. dollar?

Global finance and business is the new battlefield of the 21st century. Currency wars are an integral part of the strategy. Governments across the globe are trying to boost employment, and one of the best ways to do so is by increasing exports. Japan joined the game on September 15th by selling yen and buying dollars to devalue the yen. South Korea and Brazil have also utilized the strategy. Is this a race to nowhere? Well, it’s going somewhere, and that place may very well be stagflation.

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