Copyright Martin Armstrong All Rights Reserved 10/15/2012

The Rising Tide of Currency Protectionism

The Currency War

The front page of the Straits Times for Monday October 15th read: “Emerging economies lash out at US stimulus” Indeed, Bernanke yelled at these economies saying they should let their currencies rise to fend off the capital inflows to their economies that they see as inflationary stimulus from the Fed’s domestic policies. Once again, vision of currency wars and protectionism from the 1930s is on the horizon.

During the Great Depression, the whole trend involving PROTECTIONISM was set in motion by the wild fluctuations in currency. It does not matter how many times this issue is addressed those in power never understand and constantly try to manipulate the currency to compensate for a host of other failed policies that impact capital flows and economics trends. I wrote to Robert Rubin when he was screaming about the yen and how Japan must force the yen to rise against the dollar to reduce the United States trade deficit. I explained that the G5 that started in 1985 yelling they wanted the dollar down by 40% created the 1987 Crash, sent capital fleeing and that caused to consolidation of capital in Japan and the 1989 Bubble. Worst of all, is the arrogant assumption that government can manipulate the currency. If that were true on a long-term sustainability perspective, then the gold standard would never have collapsed in 1971. Governments cannot manipulate currencies to create jobs or affect trade beyond a very short-term perspective and even then only when their action is going with the trend.

Going into the 1981 high in interest rates, every time the Federal Reserve raised interest rates, the knee-jerk reaction in the markets became less and less. Finally, at the very peak, the Fed raised rates for the last time. The market went up instead of down. At that moment I knew the high was in place. The Fed had been raising rates with the trend in the decline in the dollar. Then it shifted 1981.35 and capital realized that it could by long-term paper in the United States earning 20%+ and the realistic probability that the USA would collapse was zero. Capital began to buy US government debt locking in the excessively high interest rates. The Fed then began to reduce rates.

The brain-dead men in power FAIL to understand their own accounting statistics. This is why I insist we need a complete revision of the World Monetary System. At Bretton Woods in 1944, all the nations establish a global clearly system that included the IMF and World Bank in addition to the US dollar being the reserve currency within the gold standard. The accounting statistics were also established and where predicated upon a fix exchange rate system – the gold standard. If money did not fluctuate, then you did not have to count the number of goods moving in and out of a country just the dollars. That was based upon the assumption that you spent more dollars you must have bought more goods.

Then the gold standard collapsed in 1971 yet the dollar remained the reserve currency. Now all currencies floated. That meant if you only measured trade by the amount of dollars moving back and forth, a 40% swing in the currency did not mean you bought 40% more tangible goods. So here we are again. As foreign countries criticize the Federal Reserve for creating money out of thin air to “stimulate” the economy, they are exporting inflation to their economies because it has become impossible for the United States to deal directly or exclusively with its economy under the “New Economics” of the Marxist-Keynesian  economic theory of manipulating the Business Cycle.

Federal Reserve Chairman Ben Bernanke has criticized foreign central bankers in developing economies in response to their complaints concerning the Fed’s easy money policies for not allowing their currencies to appreciate against the dollar. Bernanke delivered a strongly worded counterargument to their own critiques of the Fed. Bernanke is back at the same old game of currency manipulate to mask over economic problems around the world. The common argument states that when the Fed prints money, it causes investors to search for other places to put their money, causing a potentially destabilizing rush of funds into less developed economies – capital flows. This trend is also set in motion by taxation, just as the head of LOUIS VUITTON left France because of its 75% tax rate on the rich. The basic criticism of the Fed stimulus is that this policy fuels inflation and asset bubbles in their countries, and threatens to push their currencies higher to levels that would curb their exports. Such booms have been evident in Asia as the West moves into economic decline.

Bernanke’s comments were prepared for a panel discussion at International Monetary Fund meetings in Tokyo. He brow-beat the complaining nations saying that policy makers in these countries could slow this rush of capital and some of its negative effects by allowing their own currencies to appreciate. Instead, he argued, they were doing just the opposite. Yet this is where Bernanke lacks experience. If we look at the dollar/yen rate we can see it was at 120 with the 1987 Crash. The yen rose to 158.9 into 1989. The rise in the yen made Japanese assets even more profitable to foreign investors in Japan. Sorry Bernanke! Trading experience would really help a Fed Chairman. A rising currency will NOT curtail foreign capital inflows.

Indeed, Australia suffered the same stupidity during the late 1980s. They kept raising interest rates to try to quell inflation and reduce the current account deficit and experience the opposite trend. The Australian published an article on this very issue on June 30, 1989. They pointed out what we were saying that out of a $1.8 billion current account deficit, $1.2 billion was interest and dividends and was not goods. It had nothing to do with trade and manipulating currency to try to create jobs is a hair-brain idea with absolutely no foundation.

Bernanke said: “In some emerging markets, policy makers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth.” He went on to say: “However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation.” Bernanke effectively said that as capital surges in these markets, and inflation becomes a problem because policy makers in these markets he maintain could reverse their policy and change the course of the business cycle. Clearly, this was targeted at authorities in China, who he maintains intervenes aggressively in foreign-exchange markets to keep their currency closely tied to the dollar. Brazil’s finance minister, Guido Mantega, has accused the Fed of starting a “currency war.” This becomes reminiscent of the Great Depression.

Mr. Bernanke has made it clear that central bankers in developing economies should “refrain from intervening in foreign-exchange markets, thereby allowing the currency to rise.” Of course this will only benefit the USA in the mind of Bernanke. Bernanke maintains that this would better allow these economies to curtail inflation. However, as I have just demonstrated, that was simply not the case in Australia or Japan in the late 1980s. Look at Switzerland. They tied their currency to the Euro in an effort to stop the influx of capital that was pouring in to that country fleeing the uncertainty of Europe. There is no empirical evidence that such a policy would reduce inflation and allow these economies to rebalance themselves to become less dependent on exports and more driven by domestic factors. The USA began losing domestic manufacture after World War II on a correlated basis with taxation – not the currency. Bernanke even said that the policy makers in these markets should use government spending and tax policies to support their economies if needed. The Fed has no such power in the United States. That is Congress so he is now telling government what to do when the USA refuses to adopt that position. Bernanke argued:

“The resultant rebalancing from external to domestic demand would not only preserve near-term growth in the emerging market economies while supporting recovery in the advanced economies, it would redound to everyone’s benefit in the long run by putting the global economy on a more stable and sustainable path.”

Bernanke made additional arguments to support his QE3 perpetual stimulus. He stated that it is the Fed’s “[m]onetary easing that supports the recovery in the advanced economies should stimulate trade and boost growth in emerging market economies as well.” This of course is debatable. However, he did argue that the Fed policies were not the only factors that have caused capital to pour into emerging market economies in recent years. A bigger factor, he said, is that developing economies have been growing much faster than advanced economies. “Even in normal times, differences in growth prospects among countries–and the resulting differences in expected returns–are the most important determinant of capital flows.” He acknowledged the disparity between East and West stating that “[t]he rebound in emerging market economies from the global financial crisis, even as the advanced economies remained weak, provided still greater encouragement to these flows.”

Bernanke are argued that the dollar hasn’t weakened that much when compared with other currencies. However, this is due to the threat of collapse in Europe that has made the dollar the safe-haven just as it was during the early 1930s.

In summary, we seriously need a new Bretton Woods. Unless we restructure all global debt, we will be in a crisis of untold proportions by 2017. It is time we start addressing the issues and accounting is just one giant mess.

We will be focusing of the coming Currency War at the upcoming Conferences in Bangkok (Nov 2-3) and Berlin (Dec 1-2).

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