"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Thursday, November 4, 2010

Brazil, Unlike Europe, Speaks Defiantly on Currency Wars and Money Printing

This current currency war impacts all economies.  But mainly it is being fought between China and the US, with everyone else feeling the collateral damage.  Europe, under self imposed austerity, is watching its Euro climb against the dollar, threatening its weak export-led recovery.  What is Europe going to do about it?  Will it protest this currency war, or will it devalue, or will it do nothing?  Germany needs to decide, and quick, as its exports will be at risk.

Brazil's leadership is being honest about what it transpiring.  From the Bangkok Post:
Brazil will be looking to fight a "currency war'' it sees underway between the United States and China that is threatening its export sector, President Luiz Inacio Lula da Silva said Wednesday.

"I am going to the G20 to fight'' this, he said in a joint media conference with his elected successor, Dilma Rousseff, who takes over as Brazilian president in January.

Lula said he and Rousseff would be going to the November 11-12 meeting in Seoul, called by the South Korean government to discuss global economic and financial issues.

"The United States and China are waging a currency war. The United States because it wants to fix its fiscal deficit problem and China because it knows it can't continue undervaluing its money like it is,'' Lula said.

Rousseff added that "all countries apart from China and the United States see that there is a currency war.''
Brazil's crucial export sector is hurting as a cheap dollar makes its products more expensive abroad.

Lula said his government will "take all necessary measures to ensure our money doesn't stay overvalued'' against the greenback.
But what can Brazil really do by itself?

What is really transpiring in the currency war is cost shifting, or debt burden sharing.  Nations that have accrued extreme debt levels are basically exporting their inflation so the burden of their debts are felt globally.  They are also trying to gain an unfair edge for their exports. 

Historically this has worked in the past when small nations infrequently had to devalue.  But this time it's different.  The Giants:  the US, Japan, the UK, China (for export reason, not debt), are needing to devalue  ALL AT ONCE, and the entire world will feel this pain.

So ask yourself, why is that falafel in Lebanon getting expensive?  Why are those spring rolls in Thailand getting expensive?  Why is your order of tapas in Spain getting expensive?  Why is oil getting more expensive if we are in a global downturn?

Thank the Central Banks.  Because you are indirectly paying for the sins of the debtors and the insolvent banks, whether they are in your country or in another country.  Competitive devaluation means you are trying to export your pain so the whole world feels it.  Just as credit default swaps were used to spread risk, so too is competitve devaluation used to spread pain.  Meanwhile the banks continue to borrow free money and earn a risk free spread.

Is there a solution?  I'm afraid not.  Even Europe should respond in kind to this devaluation.  It is pointless to self impose austerity when everyone else is devaluing.  But either way, globalization, as we knew it, will reverse to a degree, and a new global financial system will emerge.  Unfortunately, I still don't believe the transition will be smooth. 

So the real question comes to this:  how do you want your economy to implode?  Through an immediate forced depression triggered by austerity, or thru a currency crisis somewhere down the road?

Unfortunately, I think those are the only choices we have left.  There is no growing out of a balance sheet recession shared by most industrial economies when the total debt to gdp numbers are so high.  There is no growing out of a debt overhang when your workers earn ten times more than 2-3 billion people in Asia earn.   No trade deficit nation can become a Germany overnight.  And lets be honest with ourselves, for any of the EU periphery nations to be able to export their way out of debt, they would need to have a German style economy as of yesterday.  Their debt bombs have been ticking for a while now and they are running out of time.

That said, the currency war rages on, and we will see what transpires at the upcoming G20 meeting.   I am very interested to see Europe's response as well.

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