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Sunday, 25 January 2015 00:00

Despite What You Don't Hear In The Media, It's ALL OUT (Currency) WAR! Pt. 1 Featured

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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. More than one million copies of this book have been sold.Quick note: Due to popular demand I will be accepting up to 13 UHNW clients for asset managment services and resuming the superior research that was originally disseminated through BoomBustBlog. This research will now be done through Veritaseum, my new venture. Anyone interested in the services should This email address is being protected from spambots. You need JavaScript enabled to view it.. Now, on to today's post.

The world is at war, yet it's citizens don't even know it!

First, a backgrounder, as excerpted from Wikipedia:

Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets. However, the price increase for imports can harm citizens' purchasing power. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.

... currency war broke out in the 1930s. As countries abandoned the Gold Standard during the Great Depression, they used currency devaluations to stimulate their economies. Since this effectively pushes unemployment overseas, trading partners quickly retaliated with their own devaluations. The period is considered to have been an adverse situation for all concerned, as unpredictable changes in exchange rates reduced overall international trade.

... States engaging in competitive devaluation since 2010 have used a mix of policy tools, including direct government intervention, the imposition of capital controls, and, indirectly, quantitative easing. While many countries experienced undesirable upward pressure on their exchange rates and took part in the ongoing arguments, the most notable dimension of the 2010–11 episode was the rhetorical conflict between the United States and China over the valuation of the yuan. In January 2013, measures announced by Japan which were expected to devalue its currency sparked concern of a possible second 21st century currency war breaking out, this time with the principal source of tension being not China versus the US, but Japan versus the Eurozone.

... when a country is suffering from high unemployment or wishes to pursue a policy of export-led growth, a lower exchange rate can be seen as advantageous.

...  Devaluation can be seen as an attractive solution to unemployment when other options, like increased public spending, are ruled out due to high public debt, or when a country has a balance of payments deficit which a devaluation would help correct. A reason for preferring devaluation common among emerging economies is that maintaining a relatively low exchange rate helps them build up foreign exchange reserves, which can protect against future financial crises.[4][5][6]

Of course, it seems to be lost on many that competitive devaluations (currency war) only really works for strong net export nations such as China, Japan, Germany and the US. If you are highly reliant on imports vs. exports and try to become a currency warrior then the Marshall–Lerner condition will likely occur. Best case scenario you get a significant lag in true economic benefits, likely scenario... You just piss off your neighbors and lose economic benefit as the higher price of your imports simply outweight the internal generation of economic activity and exports. After all, if you buy more than you sell, why raise the price of your purchases?

The Three Methods of Currency Manipulation

Countries and their central banks can:

Buy and sell currencies in the open market. This takes horsepower. Just ask the Swiss National Bank whose balance sheet swelled 3x in 2 years - and that's before the ECB QE announcement (which would have easily doubled the pressure, if not more). If you want to move upscale, ask the Bank of England after their conversation with Soros, et. al.

... Black Wednesday refers to 16 September 1992 when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after it was unable to keep the pound above its agreed lower limit in the ERM. George Soros, the most high profile of the currency market investors, made over 1 billion GBP[1] profit by short selling sterling.

In 1997 the UK Treasury estimated the cost of Black Wednesday at £3.4 billion, with other sources giving estimates as high as £27 billion. In 2005 documents released under theFreedom of Information Act revealed that the actual cost may have been £3.3 billion.[2]

The trading losses in August and September were estimated at £800 million, but the main loss to taxpayers arose because the devaluation could have made them a profit. The papers show that if the government had maintained $24 billion foreign currency reserves and the pound had fallen by the same amount, the UK would have made a £2.4 billion profit on sterling's devaluation.[3] Newspapers also revealed that the Treasury spent £27 billion of reserves in propping up the pound.

If you haven't picked up on the theme yet, this central bank buying currencies in an attempt to over power the markets (dirty float) stuff really just doesn't work. Over time, mother market takes charge and extracts one hell of a price in return.

Central banks can also just attempt to talk rates down or up. I'll not waste anymore words on this as CBs around the world have lost creditiblity. Talk is cheap!

Lastly, and this is the kicker, banks can engage in quantitative easing (QE). QE is essentially the injection of money into the economy by openly purchasing public and private assets, oftentimes dead assets that no private entity would touch with a ten foot pole. The PC way of putting it is this is creating money, but more aptly put this bailing out failed institutions by creating a market for things that the actual market has priced at, or close to, economically nothing. This practice was invented by the Japanese, and it didn't work! Do you guys remember the 26 year lost decade? It's not that hard to rememer since, although it started in 1990, it's still ongoing. That's Japanese central banker math for you. As per Wikipedia:

The Lost Decade or the Lost 10 Years(失われた10年 Ushinawareta Jūnen?) is the time after the Japanese asset price bubble's collapse within theJapanese economy. The term originally referred to the years from 1991 to 2000,[1] but recently the decade from 2001 to 2010 is often included,[2] so that the whole period of the 1990s to the present is referred to as the Lost Two Decades or the Lost 20 Years (失われた20年, Ushinawareta Nijūnen). Over the period of 1995 to 2007, GDP fell from $5.33 to $4.36 trillion in nominal terms,[3] real wages fell around 5%,[4] while the country experienced a stagnant price level.[5] While there is some debate on the extent and measurement of Japan's setbacks,[6][7] the economic effect of the Lost Decade is well established and Japanese policymakers continue to grapple with its consequences.

Now, there are some who said Japan did start recovering earlier, but they used the very malleable (in terms of definition) GDP numbers to prove their point. Asset values didn't back the story...

Japan lost decade

QE was taken to the next level by the only central bank that I know of that is actually owned by, and controlled by, a coterie of private, for profit, publicly traded banks. It is also the most powerful central bank in the world, bar none. Here's a hint...

Between QE1/2/3, the Fed has injected well over $3 trillion dollars and has exploded its balance sheet both in terms of size and composition...

Despite many proclamations that things are getting better, the Fed has increased its purchases of both MBS (the housing market's financial underpinnings are still in trouble of the Fed wouldn't be doing this) and US Treasury securities (the treasury issues the securities to fund the US and the Fed creates money and buys them - as wel all know, we are financing our credit cards with newly acquired credit cards). It is the Fed that IS this country (US), almost literally with a balance sheet that is over 25% of the US GDP. Remember who owns the Fed? Well, if you do you realize why the ECB is doing this QE thing to the level that it is. Their banks are still in trouble, material trouble. Reference "Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe" from 5 years ago and tell me if you think its gotten better...

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns


 Well, it's all relative. The banks are smaller, leverage is down - and that's after 6 years of global QE, ZIRP and now NIRP, yet each and every bank is big enough to collapse the country that it's domicled in... Global Bank Risk as Determined by Veritaseum

And since the big global banks are so interconnected as they daisychain their hedges and act as counterparties with each other (6 banks hold over 85% of the multi-trillion dollars global derivatives exposure), once one goes down hard, it brings the rest with them. And as you can see from the size of each individual bank relative to their domiciled country, such an event will still drag the countries down with them.

FICC Bank risk

Okay, now back to this discussion of currency wars, something's got to give. Countries cannot (or at least, have never) successfully pursued all three methods of currency manipulation without failing. According to Wikipedia:

The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:

    1. fixed exchange rate
    2. Free capital movement (absence of capital controls)
    3. An independent monetary policy

It is both a hypothesis based on the uncovered interest rate parity condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed. 

The Impossible Trinity or "The Trilemma", in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

So, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. All three are likely not going to succeed.

See part 2 of this 4 part series on on 1/26/15.

Read 6541 times Last modified on Sunday, 25 January 2015 14:09


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