Thursday, June 30, 2016


PHOTO CREDIT: (Dollar Photo Club)

A currency war, also known as competitive devaluations, is commonly defined as a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currencies.

As the exchange rate of a country's currency falls exports become more competitive in other countries, and imports into the country become more expensive causing that nation's citizens to buy products made inside their own country..

Both effects benefit the domestic industry, and thus employment, which receives a boost in demand from both domestic and foreign markets.

A currency war refers to a situation where a number of nations seek to deliberately depreciate the value of their domestic currencies in order to stimulate their economies.

Although currency depreciation or devaluation is a common occurrence in the foreign exchange market, the hallmark of a currency war is the significant number of nations that may be simultaneously engaged in attempts to devalue their currency at the same time.

When ALL countries adopt a similar strategy, it can lead to a general decline in international trade, harming all countries.

It may seem counter-intuitive, but a strong currency is not necessarily in a nation's best interests.

A weak domestic currency makes a nation's exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products.

11 Apr 2016  
Famed economist Nouriel Roubini of New York University warned in an inter view on Bloomberg TV :

"Currency tensions are mounting and the situation could explode into a full-blown currency war, between Japan and the eurozone on one side of the United States."

And he explained that the U.S. central bank's tactics are behind it all.

"The Fed has gone very dovish. They are going to hike on the investor twice this year. Even some Fed governors were talking down the dollar, and that is creating, both in the euro and in Japan, some frustration," he said.

"There is a sense in Japan and in the eurozone right now that the U.S. is cheating, pushing down the volume of the dollar in a situation where growth is improving in the U.S., inflation is going higher in the U.S, while in Europe and Japan, inflation has gone lower and growth is faltering."

He doubts there is anything that global leaders can do to stop the currency war.

"I think that intrinsically, even central bankers in Europe, they were concerned about fiscal policy and the need for austerity. They are saying we are running out of bullets. We are reaching the limits of what monetary policy can do," Roubini said.

June 30, 2016
[ Found originally at Project Syndicate.]

1~ China and investor fears about a hard landing in Beijing and its likely impact on the stock market.
“While China is more likely to have a bumpy landing than a hard one, investors’ concerns have yet to be laid to rest, owing to the ongoing growth slowdown and continued capital flight,”

2~ Emerging markets are in serious trouble.
“They face global headwinds (China’s slowdown, the end of the commodity super cycle, the Fed’s exit from zero policy rates). Most have not implemented structural reforms to boost sagging potential growth. And currency weakness increases the real value of trillions of dollars of debt built up in the last decade

3~ The Fed probably erred in exiting its zero-interest-rate policy in December.
“Weaker growth, lower inflation (owing to a further decline in oil prices), and tighter financial conditions (via a stronger dollar, a corrected stock market, and wider credit spreads) now threaten US growth and inflation expectations.”

4~ Geopolitical risks are coming to a boil. “Perhaps the most immediate source of uncertainty is the prospect of a long-term cold war – punctuated by proxy conflicts – between the Middle East’s regional powers, particularly Sunni Saudi Arabia and Shia Iran.”

5~ Oil’s price plunge. “This may now signal weak global demand – rather than rising supply – as growth in China, emerging markets, and the U.S. slows.”

6~ Global banks “are challenged by lower returns, owing to the new regulations put in place since 2008, the rise of financial technology that threatens to disrupt their already-challenged business models, the growing use of negative policy rates, rising credit losses on bad assets (energy, commodities, emerging markets, fragile European corporate borrowers), and the movement in Europe to “bail in” banks’ creditors, rather than bail them out with now-restricted state aid.”

7~ The European Union and the eurozone “could be ground zero of global financial turmoil this year.”

The situation is exacerbated by a number of factors:
  • Economic growth in most regions has been below historical norms in recent years; many experts attribute this sub-par growth to the fallout of the Great Recession.
  • Most nations have exhausted all options to stimulate growth, given that interest rates in numerous countries are already either near zero or at historic lows. With no further rate cuts possible and fiscal stimulus not an option (as fiscal deficits have come under intense scrutiny in recent years), currency depreciation is the only tool remaining to boost economic growth.
  • Sovereign bond yields for short-term to medium-term maturities have turned negative for a number of nations.
    In this extremely low-yield environment, US Treasuries – which yielded 1.86% for 10-year maturities and 2.52% for 30 years as of April 17, 2015 – are attracting a great deal of interest, leading to more dollar demand.
    [ NOTE: The above was written April 20, 2015. Things have changed much since then!]

So what are the negative effects of a currency war?
  • Currency devaluation may lower productivity in the long-term, since imports of capital equipment and machinery become too expensive for local businesses. If currency depreciation is not accompanied by genuine structural reforms, productivity will eventually suffer.
  • The degree of currency depreciation may be greater than what is desired, which may eventually cause rising inflation and capital outflows.
  • A currency war may lead to greater protectionism and the erecting of trade barriers, which would impede global trade.
  • Competitive devaluation may cause an increase in currency volatility, which in turn would lead to higher hedging costs for companies and possibly deter foreign investment.
"The Fed digs deeply into the U.S. economy, discussing very granular and specific elements of the economic puzzle, but when discussing international events, it seems disjointed and high-level. And that wouldn't be so bad, except their entire premise for not raising rates is BASED on the international worries!" Seeking Alpha's Edward Hoofnagle, CFA wrote on April 8, 2016.

"Reading between the lines, the Fed seems to be desperately fighting the USD advance over the past 12 months, highlighting repeatedly that the strong USD and weak oil is causing deflation, while worrying that further rate advances will only exacerbate the dollar increase and its deflationary push," he wrote.

This is not the time for leverage, keep some powder, and keep an eye on indicators like JNK, and VXX. If JNK falls below 33, we're back to fear mode in the fixed income markets. And if VXX spikes above 22, we're back into the topsy turvy.  
"The currency war is dead! Long live the currency war!"

May 18, 2016


The ‘truce’ in global currency wars is on borrowed time.

"Twelve weeks ago, at a G20 summit in Shanghai, the world’s big central banks worried about a highly volatile market and how to make monetary policy work.
They focused on currency manipulation as one of the causes of global economic instability and urged all countries to refrain from it.  
Alan Ruskin, FX strategist at Deutsche Bank, prefers to describe it as “an understanding”, and the understanding was that dollar strength was “starting to become problematic for global risk”.

Truce or not, the combination of these actions has resulted in a weaker dollar, a barely discernible shift in the dollar-renminbi rate, buoyant emerging market currencies, an oil price nudging $50 a barrel and a relatively becalmed market. All pretty painless, except for the eurozone and Japan, whose currencies have strengthened more than suits their economies.

It is hardly surprising, therefore, that the US government, wanting to keep things stable, has been upping the currency manipulation rhetoric.

The Treasury Department’s publication last month of a new currency watchlist, which includes China, Germany, Japan and South Korea, shows “they appear to be even more focused on that point [preventing currency manipulation]”, says Stephen Jefferies, head of emerging markets and Europe, Middle East and Africa foreign exchange at JPMorgan.

The signs are that Treasury secretary Jack Lew will use the G7 at Sendai to reinforce the importance of exchange-rate stability, so Sendai will maintain the currencies equilibrium — but for how much longer?

The broader picture is more gloomy because currency stability is masking failures in monetary policy. Each central bank is struggling with its own demons, says Steven Englander, head of G10 FX strategy at Citigroup. — the Fed fears hiking rates, the ECB fears taking monetary easing further, the BoJ fears further disaster if it extends its negative interest rates policy and the PBoC fears the debt growth that accompanies each easing strategy.

“The question is which central bank needs the move the most, and which can find a way of mitigating the downside of a rates change,” says Mr Englander.

Market commentators are asking not how long a currency truce lasts, but what comes after it.

At some point, the US, Japan or China is going to decide that domestic policy needs to trump FX stability, “and once one moves, the genie is out of the bottle”.  

The Real Currency War
Analysis ,  April 28, 2016

[WEBSITE NOTE, STRATFOR: The analysis contained herein reflects the views of ETM and not of Stratfor. In fact, as you will see, it is different from our existing worldview in some significant ways. We are sharing this with our readers because it is good work, produced using rigorous analytic tools and methodology.This is the fourth installment of a five-part series authored by ETM Analytics, an economic and financial advisory firm with offices in the United States and South Africa.]

"The notion of a global reserve currency has come to mean very different things since the Bretton Woods system started in the 1940s — and particularly after it ended in the 1970s. Under the classical gold standard, which was in place from 1815 to 1914, gold served as the principal asset underpinning the reserve currency: the British pound sterling. As the world's chief superpower and creditor nation, Britain was the system's custodian, backing the pound with gold at a rate of 4.25 pounds per ounce.
Other countries' banks held both gold and pounds in reserve as well. Because customers could exchange currency for gold at any time, bank runs were still a threat, keeping in check any undue credit and bank note expansion or abuse of financial power.

For Britain, controlling the world's reserve currency was more a matter of responsibility than of privilege.   
But throughout the early 20th century, three developments fundamentally changed the system altogether. First, European powers and the budding United States began to threaten Britain's hegemony, setting in motion a decadeslong redistribution of power that would be settled only after the conclusion of World War II. Second, Washington and Wall Street established the Federal Reserve in 1913.

Two decades later, President Franklin Roosevelt passed the Emergency Banking Act of 1933, confiscating gold and weakening its ties to the United States' monetary and payments system.

Then, the New Gold-Exchange Standard, one of the key byproducts of the Bretton Woods agreement, eliminated citizens' ability to redeem national currencies in gold, reserving that privilege for governments and their central banks.

And so, gold was systematically and deliberately shifted from private hands to the control of states. It could no longer act as a market-based check on the expansionary policies of governments and banks.

The system of fully nationalized fiat currencies that emerged in its place in the early 1970s gave states — especially the United States — the ability to expand their power to its fullest, using a near-unlimited number of financing tools unconstrained by the gold standard.
Controlling the global reserve currency then became more a matter of privilege than of responsibility.

The Battle for Currency Supremacy

Now, the United States' infallibility and the pillars that once supported the dollar's pre-eminence have been shaken.

The harder Washington fights to hold onto its exorbitant monetary privilege, the more it leverages its position by expanding its debt-based growth model and its preference for fiscal and monetary palliatives over painful but necessary structural reforms. Meanwhile, lesser global powers are becoming less willing to allow Washington its privilege if it cannot or will not pay for it through hegemonic dominance, stable state finances and monetary dependability.

Still, challenges to the dollar's supremacy have not been particularly successful.

Europe tried to wrestle the United States' exorbitant privilege away, but the apparent failure of the European project has called into question the euro's ability to unseat the dollar.

The United States' other major challenger, China, is a productive nation with far-reaching trade ties and the capability to draw others into its currency zone by extending offshore loans.

But China is going to get old before it gets rich, and its politics continue to focus inward while its finances remain fragile.
To cultivate international trust in the yuan, Beijing would have to open its trade and capital accounts, allocate resources more efficiently and rid itself of debt — reforms that may create more political instability than the government would prefer. 

Two Brutal Fronts

The shift in currency reserve status from custodial responsibility to exorbitant privilege has imbued the global monetary system with a self-destructive impetus that potentially inheres toward instability.

This instability is caused by the world's major powers pursuing two incompatible goals: currency debasement (lowering the value of money) and fostering currency confidence.

As the biggest reserve currency power, the United States means to instill confidence in the dollar so that it can maintain its privilege. But to reap the benefits of its privilege, the United States tends to adopt inflationary policies that erode confidence over time.

Other major powers, feeling the need to show that they can play minor reserve currency roles or potentially usurp the dollar, have tried to wrest back some privilege of their own through monetary inflation.

After all, the essence of monetary privilege is the ability to print money without having it sold into oblivion by the rest of the world.

The United States' privilege was on full display from 2008 to 2014 as it printed trillions of dollars without devaluing its currency. (Zimbabwe and Venezuela, by comparison, have tried to tap their privilege with far less success.)

The tension between the United States and other powers has set the scene for currency trench warfare on two brutal fronts.

On the first, states are mounting inflationary insurrections to gather as many resources as they can before foreigners discount their currencies. Money printing, bank credit expansion and deficit spending are the weapons used in these raids, which are simply manifestations of the tragedy of the monetary commons that has arisen from the fluctuating fiat currency system.

On the second front, states vie for reserve currency stature, a battle that can be fought in one of two ways.
(1) A state can tighten its monetary policies, reduce national debt and raise productivity, an option that requires painful internal adjustment and surrender on the first front.

(2) The alternative is to create economic, financial and military dependency on itself — or leverage dependency where it already exists — to encourage other countries to adopt its currency.

Trade policies, the military-industrial complex and global financing institutions are the weapons of choice on this front.

States that can fortify an advantageous position in the reserve currency battle can gain cover for inflationary raids, but that does not mean they are clear of danger; if they expend too many resources on raids, their reserve currency positions will be put in jeopardy.

But striking the right balance is easier said than done, and all too often clashes break out, breeding tremendous financial and economic volatility that leaves many casualties in its wake.

[T]he geopolitical order abhors the exorbitant privilege afforded by the reserve currency and that superpowers tend to wield their full influence to maintain that privilege — even at the risk of exacerbating international imbalances.

The system then becomes bogged down by inflationary insurrections and conflict as other states try to secure resources and project power to encourage greater foreign reliance on them. Eventually, the monetary order must undergo radical shifts to adjust to the tension. These shifts cause financial instability worldwide, undermining the integrity of national currencies and even the state-centric currency model itself.

The real war being waged, then, is between the political forces of centralized money and the market forces of decentralized finance.
This war has been waged for centuries, if not millennia, and it has always pitted the sovereign's imperative for money nationalization against the market's imperative for monetary innovation.

Currency centralization serves the state's purposes, enabling it to extract profits through seigniorage (the face value of money minus the cost of physically creating it), finance wars, regulate the banking system, control transactions and levy taxes.

Decentralization does the opposite, protecting citizens from state resource predation through inflation, diminishing the state's control of transactions and curtailing the state's overall financial power. In this way, the relationship between the state and its people is profoundly affected by the orientation of the global monetary system.


If the market-based currency revolution is here to stay, what will the world it brings about look like? Though it is a difficult question to answer, one conclusion is clear: The future of the U.S. dollar, long the world's dominant currency, is far from assured.


"Greater than any single threat is the very real danger of the collapse of the dollar itself."

In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar.

Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.Currency wars are one of the most destructive and feared outcomes in international economics.
At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence.

Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.
Currency wars have happened before-twice in the last century alone-and they always end badly. Time and again, paper currencies have collapsed, assets have been frozen, gold has been confiscated, and capital controls have been imposed. And the next crash is overdue.  

Recent headlines about the debasement of the dollar, bailouts in Greece and Ireland, and Chinese currency manipulation are all indicators of the growing conflict.

As James Rickards argues in Currency Wars, this is more than just a concern for economists and investors.  
The United States is facing serious threats to its national security, from clandestine gold purchases by China to the hidden agendas of sovereign wealth funds.
Greater than any single threat is the very real danger of the collapse of the dollar itself.

Baffling to many observers is the rank failure of economists to foresee or prevent the economic catastrophes of recent years. 
Not only have their theories failed to prevent calamity, they are making the currency wars worse.

The U. S. Federal Reserve has engaged in the greatest gamble in the history of finance, a sustained effort to stimulate the economy by printing money on a trillion-dollar scale. Its solutions present hidden new dangers while resolving none of the current dilemmas."


"Gerald Celente has issued a warning that the Brexit campaign was something of a launching point for what is going to become a total collapse scenario.

Markets have rattled with major currency swings surrounding the Pound Sterling, and everyone is in for a devastating sequence of events. The future of the EU, and its tenuous relationship with Britain is unclear, and the financial reaction is significant.

Immigration pressure is creating social chaos, and the population is becoming fed up with the establishment and their abuse of power. Europe faces an even larger threat of further concentrated and more heavy-handed government power, through a more desperate EU regime.

If populism spreads along with anti-EU sentiment, there could a return to national currencies, and the destruction of the Euro itself. Under such conditions, gold might be expect to gain in value, and a global currency may attempt to emerge. As Celente says, “The war has begun.”
Exactly how it plays out remains to be seen.

JUNE 29, 2016  
Gerald Celente: " Although stocks bounced back on 'Turnaround Tuesday' on the belief that contagion has been contained following the rout that wiped out $3.6 trillion from equity markets following Great Britain’s referendum last Thursday to 'Brexit'  the European Union… we disagree. It’s bigger than Brexit…

Since then, gold hit two-year highs, the British pound fell to 31-year lows and currencies around the world hit new lows against the US dollar.

With employment numbers weakening, GDP tepid, manufacturing slumping, durable-goods orders falling and productivity growth declining… several days before the Brexit vote, Fed Chair Janet Yellen, in defense of not raising interest rates, declared, “Recent economic indicators have been mixed, suggesting that our cautious approach to adjusting monetary policy remains appropriate.”

JUNE 11, 2016  
Coming Currency Wars Will Make 1930s Look Like Picnic – John Mauldin

On June 8, the London Stock Exchange issued the first Chinese offshore sovereign bond, setting the table for the internationalization of the Renminbi currency.  This move had been months in the making when the City of London had signed an agreement to participate in Yuan denominated Chinese bonds being sold in their global markets.

This move also is another step in China’s ultimate plan to have the Yuan currency be on par or greater than the dollar as a medium of trade, especially following last year’s acceptance into the IMF’s SDR basket of reserve currencies.

This is the worst two week drop in European banks since April 2012…
Jim Rickards – Gold is Going to $10,000.00 oz
Carl Icahn told CNBC on Thursday that bearish bets by fellow billionaire investor George Soros have merit because the stock market has been artificially boosted by prolonged low interest rates.

Some of the values in stocks, “you just have to wonder,” the chairman of Icahn Enterprises told “Squawk Box” in a wide-ranging interview.

Soros has returned to trading after a long hiatus, according to The Wall Street Journal, directing a series of big, bearish investments.
The paper reports he sold stocks, and bought gold and shares of gold miners.


"The world is at risk of a currency war after the Brexit vote, as each economy seeks to devalue their own money in a bid to boost growth, Mario Draghi has warned.

The European Central Bank president urged colleagues across the globe to coordinate their efforts, in order to avoid competitive currency devaluations between economies, which could undermine attempts to boost world growth.

The ECB president said that competitive devaluations of this kind, often known as currency wars, were a “lose-lose for the global economy, since they only lead to greater market volatility, to which other central banks are then forced to react”.


June 23, 2016 
U.K.'s $140 Billion Currency War Chest Ready for Brexit: Chart ...

"Britain’s official holdings of international reserves, which include foreign-currency assets and gold, have increased 12 percent in the past year to a gross $140 billion, according to Bank of England data.

JUNE 23, 2016
The Threat of Currency Wars: TIME Explains - Video








~Currency Manipulation by the United States Is Alive and Well


~Roubini: The Risk of a Long-Term Crash Is Increasing

 ~What Is A Currency War And How Does It Work?

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