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Currency wars arise when a country steals growth from trading partners by
cheapening its currency to promote exports. The new currency war began in 2010 when President Obama declared in his State of the Union address that it was the policy of the United States to double exports in five years. Since the U.S. would not become twice as productive in five years, the implication was the U.S. would severely cheapen its currency to achieve this goal. [Let me expand upon this.] Words: 666
So says Jim Rickards in edited excerpts from the original article* as posted on Seeking Alpha which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. (This paragraph must be included in any article re-posting to avoid copyright infringement.)
Rickards goes on to say, in part:
Why Cheapen The USD?
The Federal Reserve set about trying to cheapen the dollar through policies such as quantitative easing – the printing of money – and zero interest rates. The idea was to make the U.S. dollar unattractive to foreign investors and import inflation from abroad through higher import prices. The prospect of inflation would encourage Americans to borrow and spend and ultimately get the U.S. economy growing. Inflation was being encouraged for the first time in forty years because it was the key to reducing the real value of America’s debt.
Who Does It Hurt?
This U.S. policy of devaluation and inflation would hurt not only foreign investors but also U.S. savers who held bank accounts, insurance policies, retirement plans, annuities and other fixed-income investments. All savers and investors, both U.S. and foreign, would be deprived of the value of their savings through U.S. dollar devaluation in order to benefit banks, hedge funds, speculators and other leveraged investors…
How Is Inflation Imported?
In order to import inflation from abroad, the U.S. must devalue against the euro, the Japanese yen, the South Korean won and the currencies of all trading partners in the global supply chain and, because of this, the importance of countries such as South Korea and Taiwan as trading partners to the United States goes well beyond their bilateral trade relationships. For example, South Korean value added is embedded in the U.S. trading relationships with China, Vietnam, Indonesia and other countries engaged in assembly of components. A country such as South Korea is even more of a target for U.S. efforts at devaluation than China itself. If the U.S. is successful in devaluing the dollar against the South Korean won, the result for South Korea will be lost exports, lost tourism and lower earnings for South Korean based global corporations that earn profits abroad.
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Countries such as South Korea, Taiwan and Brazil are often the biggest losers in a currency war because their exports suffer from devaluation of major currencies such as the dollar but they lack the status of a reserve currency and the ability to defend their valuations by redirecting capital flows in their favor. These countries are the silent victims of currency wars. They are important enough to suffer revaluation but not powerful enough to change the outcome. In the end, these countries may have to resort to capital controls similar to those imposed recently by Switzerland to prevent a super-strong local currency from further damaging their economies.
What Are The Ramifications?
This scenario – one country trying to devalue its currency and inviting retaliation from other countries – is at the heart of all currency wars. The result can either be a deflationary contraction of world trade as seen in the 1930’s or an inflationary destruction of wealth as seen in the 1970s. An even worse outcome – hyperinflation followed by a crash and deflation – cannot be ruled out.
Conclusion
Citizens everywhere should realize that competitive devaluations are not a path to prosperity – they are a path to ruin. The currency wars have not run their course, they have only just begun…
*http://seekingalpha.com/article/382681-the-real-targets-of-currency-wars?source=email_macro_view&ifp=0
Editor’s Note: The above article has been has edited ([ ]), abridged (…) and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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