The Currency War Heats Up
During the last debate, Mitt Romney emphatically stated he would blast China for manipulating its currency the first day he takes office. Talk about priorities. Of all the nation’s pressing issues, the minute the oath is over, he’ll be calling out China for manipulating the yuan.
A remark like that should cause exasperation for anyone in the know. As Mary Anastasia O’Grady writes in The Wall Street Journal, “To be consistent, Mr. Romney should call out the Federal Reserve on day two for engaging in its own currency manipulation by way of ‘quantitative easing,’ which undermines the value of the dollar relative to Latin American currencies.”
About a month ago, Brazilian Finance Minister Guido Mantega called out Ben Bernanke for manipulation, blasting the Fed’s QE3 (or QE Infinity) policy for setting off currency wars.
Again this year we’ve had the Fed, the ECB, and the Bank of Japan all announcing easing within days of each other. And the effects are inflation in China, food riots in Egypt, stock bubbles and consumer price inflation in Brazil, and higher unemployment in developing countries.
International Monetary Fund Managing Director Christine Lagarde took the central banks to task in a speech delivered at the IMF’s October meeting, warning that easy money from developed country central banks creates asset price bubbles in developing countries.
Romney’s hectoring of China is not so harmless. Combine the Romney rhetoric with the Federal Reserve’s stated policy to keep interest rates at virtually zero until… forever, these are the sounds of Currency War III (CWIII) in its initial stages.
The big picture is that governments inevitably reduce the value of their currencies to the value of their physical content. But in the meantime, politicians are looking for votes, and governments look for advantage over competing governments. It is not just rockets and bombs that are fired; war is raged on the economic front, with currency manipulation as the primary weapon.
While American politicians talk about peace, America’s military-industrial complex wages war all over the world. At the same time, we constantly hear noise about a strong dollar, while America has been a leading advocate of currency debasement for the past 200 years: through the Revolution, the Civil War, the Great Depression, the inflation of the Carter years and now Bernanke’s QE Forever.
James Rickards in his book Currency Wars warns of a complete collapse of the dollar. He says that Fed chair Ben Bernanke “is engaged in the greatest gamble in the history of finance.” He says the dollar crash is overdue and that it’s not a matter of guesswork — the preconditions are already in place.
Bernanke’s attempt to print America’s way out of its economic jam is, in essence, the declaration of a currency war on the entire world. And the major central banks are retaliating. Rickards writes, “The new currency war is the most meaningful struggle in the world today — the one struggle that determines the outcome of all others.”
The author explains that while currency wars are fought on the world stage, they begin with a domestic economy lacking in growth, high unemployment, a weak banking sector, and worsening public finances. With economic growth stymied, time and time again, countries look to depreciate their currencies to promote export growth and investment. Sound familiar?
There was once a classical gold standard in the world, and it was self-equilibrating, operated like a club, with members strictly adhering to the unwritten but well-understood rules. Free-market forces prevailed; government interventions were minimal; exchange rates were stable. It worked because there was no U.S. central bank to mess up monetary matters.
This monetary tranquility was jarred with the creation of the Federal Reserve in 1913. The Federal Reserve Act was just a part of the wave of legislation brought about by the Progressive movement. Big business was tired of competing and continually innovating to stay ahead of falling prices. Business would much rather use the power of government to establish and maintain cartels in an effort to ensure high profits. The plan was to transform the economy from more or less laissez-faire to centralized and coordinated statism.
What Rickards calls Currency War I began with the German hyperinflation in 1921 and ended with France breaking with gold in 1936 at the same time England was devaluing the pound sterling. In between were continual monetary fireworks.
Moviegoers who’ve seen Midnight in Paris probably wonder how or why an amazing collection of literary and creative U.S. expatriates ended up in Paris in the mid-1920s. The answer is that the French franc collapsed in 1923, allowing Ernest Hemingway, Scott and Zelda Fitzgerald, and Gertrude Stein to afford comfortable lifestyles in Paris by converting their dollars from home.
By this time, the classic gold standard was long gone, replaced by a deeply flawed gold-exchange standard that allowed centrals banks to inflate, causing the boom of the 1920s, which therefore brought about the required correction of the 1930s, exacerbated by government policy.
FDR started his term in office by closing banks and then confiscating the people’s gold. The language of FDR’s order is chilling, giving citizens until May 1, 1933, to deliver to the Federal Reserve System “all gold coin, gold bullion, and gold certificates now owned by them” with the threat of a $10,000 fine or 10 years in prison.
Citizens received $20.67 per ounce from the government, only to watch their new president move the price up to $35 an ounce over three months — a 70% devaluation.
Rickards places Currency War II from 1967 to 1987. In between CWI and CWII was the Bretton Woods era (a phony gold standard scheme) that both Henry Hazlitt and Jacques Rueff predicted would collapse, setting the stage for CWII.
CWII began with a number of crises in the British sterling and then a flight from the dollar into gold, with French president Charles de Gaulle calling for a return to the gold standard. The French president “helpfully offered to send the French navy to the United States to ferry the gold back to France.”
This all led up to Richard Nixon preempting Bonanza on Aug. 15, 1971, telling the nation he was closing the gold window, because of evil international speculators. Of course, it was money printing and budget deficits that were to blame. Nixon also instituted a 10% surtax on all imports, effectively devaluing the dollar in the trade arena.
The devaluation was to spur employment, but within two years, the United States was mired in recession. The United States suffered three recessions from 1973 to 1981, while purchasing power dropped by half from 1977 to 1981. Suddenly, “stagflation” was on the tip of everyone’s tongue.
Paul Volcker took over as Fed chairman and quickly hiked interest rates, looking to stop the price inflation. The price of gold collapsed along with the inflation rate, and the dollar strengthened.
But dollar strength finally got in the way of export jobs and the Plaza Accord of September 1985 was an attempt to drive down the greenback’s value primarily against the yen and the mark. And it worked, from 1985 to 1988: The dollar fell 40% against the French franc, was cut in half against the yen, and fell 20% against the mark.
However, the devaluation did little for the U.S. economy, and by 1987, monetary authorities met in Paris at the Louvre. The Louvre Accord was hatched to stop the dollar’s fall. The Bank of Japan’s willingness to expand its money supply to depreciate the yen would fuel one of the biggest stock market bubbles of all time, with the Nikkei stock average roaring from around 10,000 in 1985 to a peak of 38,957.44 on Dec. 29, 1989. More than two decades hence, that market still hasn’t recovered.
Currency War III has just begun, and after 40 years of massive money printing and the explosion of derivatives, CWIII will be fought on a massive scale, with a real risk of a collapse of the entire monetary system.
So how’s this currency war to end all currency wars going to turn out? Let’s use Ludwig von Mises’ outline of the three stages of inflation.
In Mises’ stage one, government prints all the money it can, because prices don’t rise nearly as much as money supply.
In stage two, the demand for money falls, which intensifies price inflation.
Finally, in stage three, prices go up faster than money supply. A shortage of money develops, and people urge government to print more; when the government does this, prices and money supply spiral upward.
A small change in preferences among just a few people could lead to a collapse, because the financial framework is a weakly constructed Keynesian contraption of fiat money, government deficits and financial alchemy. Any one of thousands of events could trigger the collapse, and the last straw will not be known until after the fact.
It’s been said that war is the health of the state. Currency war is a desperate government willing to wreck it citizens’ lives to benefit its own agenda. Chaos is the most likely outcome of the latest currency war. It won’t be pretty. After the government gets desperate, it gets mean. After currencies collapse, the government freezes people’s assets, gold is confiscated, and capital controls are imposed.
A currency war is neither a spectator sport nor a game. We all have to participate. It’s the government’s war on each and every one of us. It’s not a matter of if: The war has already started.
Now is the time to get prepared. First, order Jim Rickards’ Currency Wars from Laissez Faire Books to understand the problems we face on the currency front.
Next, I’d like to introduce you to Addison Wiggin’s Apogee Advisory. “Apogee,” as you may know, means the “farthest and highest point.”
And in Addison Wiggin’s Apogee Advisory, that’s what you’ll get — high-level economic and financial analysis boiled down to actionable solutions.
Wiggin is the New York Times best-selling author of three books on this subject, including The Little Book of the Shrinking Dollar, which will be mailed to you free with a trial subscription to Apogee.
This war on you has already started. There is no time to waste.
Original article posted on Laissez-Faire Today