14 June 2010

How I Learned to Stop Worrying And Love the Currency Collapse

The title is a reference to the culturally significant film, Dr. Strangelove, a satire on the fear of nuclear war that was so integral to the post war generation in the US.

If one reads this carefully, the BIS is really referencing a devaluation of about 22% which is hardly 'a collapse.' Here are some examples of post WW II currency collapses.

It depends on the timeframe, specifically the rate and extent with which the devaluation occurs. Also, it matters about what the devaluation has been against. Is it a relationship primarily to a reference point like the US dollar, largely affecting a narrow band of imports, or is it a true and general devaluation marked by soaring prices and monetary inflation domestically.

As I recall, China devalued the yuan by about 33% in the 1990's, and then pegged to the dollar, while 'persuading' first Bill Clinton (remember the Chinese campaign contributions scandal) and then George W. (whose family has a long history of supporting tyrannies for personal economic preferences) to allow them to maintain favored nation status, with the dispensation of 44% import tariffs, even while maintaining an artificially devalued currency, under full currency controls, and that fixed in a peg to the dollar.

"I am moving, therefore, to de-link human rights from the annual extension of Most Favored Nation trading status for China." --President Bill Clinton, announcing MFN status for China, White House, 5-26-94.
1994, Jan. 1 – China unifies its dual exchange rates by bringing the official and swap centre rates into line, officially devaluing the yuan by 33 percent overnight to 8.7 to the dollar as part of reforms to embrace a “socialist market economy”.
As you may recall, in 1994 Bill Clinton also pushed through the NAFTA agreement which, in his words, would 'level the playing field' for American, Canadian, and Mexican workers. Only a few really understood the inherent danger in leveling the field without a thorough integration. The current Greek dilemma is a good example of a halfway done scheme in which monetary policy does not match up well with fiscal policy and national temperament.

When one uses globalization of trade to 'knock down barriers,' among the barriers that are placed at risk are things like the Constitutional safeguards which a free people enjoy in their own domestic method of organization, such as healthcare, the right to organize, freedom from indentured servitude, child labor, individual rights, and so forth.

These are the very barriers against the tyranny and despotism of the few on which the country was founded in a dramatically historical rebellion of the common people against the injustice of autocrats and empires. This was the rationale for the great Wars. Well, the one world government types play the long game, and if at first you do not succeed...

So yes, in this case China was able to export their structural employment problems largely to the US, which gutted its manufacturing sector primarily for the benefit of the Banks, who were able to cash in on the 'strong dollar' and the decline of government protection for its citizens from criminal control fraud.

Personally I think that high tariffs on Chinese goods would work much better for the US than a general currency devaluation per se given its position as a net importer, The downside would be that in the short term there would be less of a market for the export driven debts incurred by supporting the development of a non-democratic country engaged in blatant currency manipulation and mercantilism.

But do not fear, enough palms have been crossed so that one would never expect a simple solution to occur. Political and financial fraud dwells in the realms of artificial complexity. And the competitive but managed devaluations of currencies will serve to transfer more wealth from the many to the few quite well, a sort of hidden tax on the mob, while the wealthy continue to benefit.

But then again, the BIS may just be priming us for a crisis to come, which is consistent with the steady but quiet migration into gold by the wealthy, despite the propaganda they might put out for the masses to hear. As Pliny the Elder observed, "Ruinis inminentibus musculi praemigrant:" When collapse is imminent, the little rodents flee.

As an aside, here is a fairly good example of a man's thinking. Notice how Keynes changed his views of globalization from the euphoria of the British empire expressed the famous passage in "The Economic Consequences of the Peace" in 1920 which sounds like an Ode to the British Empire:
"What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice."
After a period of years we can see his shift in thinking, albeit reluctantly and with many caveats, towards practical National Self-sufficiency in 1933.
"I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage. I thought England's unshakable free trade convictions, maintained for nearly a hundred years, to be both the explanation before man and the justification before Heaven of her economic supremacy. As lately as 1923 I was writing that free trade was based on fundamental "truths" which, stated with their due qualifications, no one can dispute who is capable of understanding the meaning of the words...It is a long business to shuffle out of the mental habits of the prewar nineteenth-century world. It is astonishing what a bundle of obsolete habiliments one's mind drags round even after the centre of consciousness has been shifted. But to-day at last, one-third of the way through the twentieth century, we are most of us escaping from the nineteenth; and by the time we reach its mid point, it may be that our habits of mind and what we care about will be as different from nineteenth-century methods and values as each other century's has been from its predecessor's...For these strong reasons, therefore, I am inclined to the belief that, after the transition is accomplished, a greater measure of national self-sufficiency and economic isolation among countries than existed in 1914 may tend to serve the cause of peace, rather than otherwise. At any rate, the age of economic internationalism was not particularly successful in avoiding war; and if its friends retort, that the imperfection of its success never gave it a fair chance, it is reasonable to point out that a greater success is scarcely probable in the coming years...I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel--these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. Yet, at the same time, those who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction."

I wonder if he lived today Keyens would agree that globalization leads inevitably towards restraints among nations, and a bias towards one world government. I think he would, and he would not be favorable towards it. Make no mistake, some view this favorably as the final solution to managing the unruly masses, and preventing the wastefulness of war and sub-optimization of individual choice by those who they consider and portray as unfit to rule themselves. The shift in Keynes thought is unmistakable, and I admire the self-knowledge he portrays in analyzing, examining, and understanding his own prejudices. It takes a great mind to rise above oneself and their own age.

Quite frankly I do not expect the Fed and Treasury to ever let go willingly of the reins of the economy, or reigns of power if you will, through their aggressive financial engineering in partnership with the Banks. A return to normal will not be achieved without a significant amount of effort, conflict and most likely, pain. It appears to be unavoidable now. As you may recall, Dr. Strangelove was insane, and his dark vision affected the politicians around him. One has to wonder if Barack, Ben, Tim and Larry have their reservations made for a place in the mineshafts.

The customary price of freedom will be paid, as always. The light of freedom may be extinguished for a time, but like a spark that is cherished in thoughts and hearts of the true, will remain to be revived again on some future day.

Currency Collapse May Stimulate Economic Expansion, BIS Says
By Matthew Brown

June 14 (Bloomberg) -- Currency collapses tend to spur a resumption of economic growth rather than fueling a decline in gross domestic product, according to the Bank for International Settlements.

Currency collapses are associated with permanent output losses of about 6 percent of GDP, on average, though the drop tends to appear beforehand, the Basel, Switzerland-based BIS said in its quarterly review yesterday.

“This suggests that it may not be the currency collapse that reduces output, but rather the factors that led to the depreciation,” Camilo E. Tovar wrote in the study. “To gain a full understanding of the implications of currency collapses on economic activity it is important to carefully examine the full circle of events surrounding the episode.” (How about the utter destruction of savings and the impoverishment of millions? That has a dampening effect as I recall from the stories that my grandparents told. - Jesse)

The positive effects of a weaker currency on GDP, including making local products cheaper than imported goods, may outweigh the negative ones, such as rising inflation. Currency collapses occur when the annual exchange rate drops by about 22 percent, according to the BIS, which identified 79 such episodes, “more commonly in Africa than in Asia or Latin America,” since 1960, Tovar said.

“They also occurred under all types of currency regimes, except possible floating-exchange-rate regimes, where there are simply too few observations to obtain meaningful estimates,” the BIS said.

Economic Contraction

The euro tumbled about 20 percent against the dollar between Nov. 25, 2009, and last week as investor concern over record budget deficits in countries including Greece spurred speculation the 16-nation currency union may split. The European Union in May crafted a 750 billion-euro ($908 billion) rescue package to stem the crisis.

Greece’s economy will contract 3.9 percent this year and 1.2 percent in 2011, after shrinking 2 percent in 2009, according to the median of eight economist estimates compiled by Bloomberg. The euro-region will expand by 1.1 percent this year and 1.5 percent in 2011, after falling 4.1 percent last year, median forecasts show.

Hans-Werner Sinn, president of Germany’s Ifo economic institute, said on June 3 that it would be best for Greece to leave the euro instead of implementing an austerity program to reduce its deficit. Greek Prime Minister George Papandreou pledged budget cuts worth almost 14 percent of GDP to bring the deficit within the EU limit of 3 percent by the end of 2014.

“The real solution for Greece would be to leave the euro followed by a depreciation” of the new currency, Sinn said in an interview at a conference in Interlaken, Switzerland.

Growth May ‘Dominate’

European Central Bank Executive Board member Lorenzo Bini Smaghi said on May 28 that there are “no alternatives” for Greece beyond following the austerity program.

“Before drawing policy conclusions we should emphasise that these results are subject to a number of caveats,” the BIS said in the report. “Most importantly, the analysis does not address the reasons why currency collapses occur in the first place. Our analysis also has little to say about the mechanisms involved after the currency collapse takes place. While we cannot disentangle the various factors, our results do suggest that expansionary mechanisms tend to dominate.”