- When the currency of a country starts to collapse, foreign investors will abandon the currency and repatriate their monies, ie take them out of that country. This capital flight can destroy the financial system of a country.
- The perfect example is the 1997 Asian Financial Crisis. When capital started fleeing a country, banks soon found themselves short on money. Interest rates was bid higher to attract money. Overnight some interest rates went up as high as plus 5-10%. Mortgage rates which were 3-4%, went to 10-15% in a matter of a few weeks. The USD went on a rampage and local currencies crashed. As local currencies collapsed, stock markets and property market went into a tailspin. This vortex kept feeding on itself collapsing economies.
- The idea of capital control is to prevent capital flight or large sudden inflow of money. We will see more of such measures in the coming few years. When money flees a country, it can cause the collapse of the economy and financial system. When a large amount of money sloshes into a country, it will cause a sudden spike in the value of the currency and inflation. Imagine trillions of dollars sloshing into a small economy/country like Singapore bidding up all the real estate prices, stock prices and so on. This is not economic growth but speculation. No real wealth is generated but prices have risen.
Capital controls eyed as global currency wars escalate
Stimulus leaking out of the West’s stagnant economies is flooding into emerging markets, playing havoc with their currencies and economies.
Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and even Poland are either intervening directly in the exchange markets to prevent their currencies rising too far, or examining what options they have to stem disruptive inflows.
Peter Attard Montalto from Nomura said quantitative easing by the US Federal Reserve and other central banks is incubating serious conflict. “It is forcing money into emerging market bond funds, and to a lesser extent equity funds. There has truly been a wall of money entering many countries,” he said.
“I worry that we are on the cusp of a competitive race to the bottom as country after country feels they need to keep up.” Brazil’s finance minister Guido Mantega has complained repeatedly over the past month that his country is facing a “currency war” as funds flood the local bond market to take advantage of yields of 11pc, vastly higher than anything on offer in the West.
“We’re in the midst of an international currency war. This threatens us because it takes away our competitiveness. Advanced countries are seeking to devalue their currencies,” he said, pointing the finger at America, Europe and Japan. He is mulling moves to tax short-term debt investments.
Goldman Sachs said net inflows have been running at annual rate of $520bn (£329bn) in Asia over the last 15 months, and $74bn in Latin America. Intervention to stop it creates all kinds of problems so the next step may be “direct capital controls”, the bank warned.
Brazil’s real has been one of the world’s strongest currencies over the past two years, aggravating a current account deficit nearing 2.5pc of GDP. The overvalued exchange rate endangers Brazil’s industry, especially companies that compete with Chinese imports. The real has appreciated to 1.7 to the dollar from 2.6 in late 2008, and by almost the same amount against China’s yuan.
“Everybody is worried that global growth is fading and they are trying to use exchange rates to protect exports. Brazil has watched as the Asians intervened and feels it can’t stand by,” said Ian Stannard, a currency expert at BNP Paribas.
Brazil has used taxes to slow the capital inflows but the allure of super-yields and the country’s status as a grain, iron ore, and commodity powerhouse have proved irresistible. It is a textbook case of the “resources curse” that can afflict commodity producers.
A $67bn share issue by Petrobras has been a fresh magnet for funds, forcing the central bank to buy an estimated $1bn of foreign bonds each day over the past two weeks. Such action is hard to “sterilise” and can it fuel inflation.
Japan has begun intervening to stop the yen appreciating to heartburn levels for Toyota, Sharp, Sony and other exporters. A strong yen risks tipping the country deeper into deflation. Switzerland spent 80bn francs in one month to stem capital flight from the euro, only to be defeated by the force of the exchange markets, leaving its central bank nursing huge losses.
Stephen Lewis from Monument Securities said the Fed is playing a risky game toying with more QE. There are already signs of investor flight into commodities. The danger is a repeat of the spike in 2008, which was a contributory cause of the Great Recession. “Further QE at this point may prove self-defeating,” he said.
Meanwhile, Dominique Strauss-Kahn, managing director of the International Monetary Fund, tried to play down the fears of a currency war, saying he did not think there was “a big risk” despite “what has been written”.
- The currency war has definitely started. Countries are debasing their currencies to maintain export competitiveness. America will eventually find that they are not able to weaken the USD as much as they want. Other countries can absorb a weakening USD up to a point. But when one of their closes competitor decides to follow the USD down, the others will follow.
- This beggar thy neighbour policy will not work. Competitive devaluations do not work. Fiat currencies are headed towards toilet paper status. The FedRes and US Treasury department will finally come round to a revaluation of gold price upwards massively. This amounts to a devaluation of the USD against gold. Foreign countries will then have to decide whether they too will revalue gold price in their local currencies. I can assure you all countries will do so. This will stoke inflation throughout the world. The intent is to get the sheeple to abandon their fiat currencies savings and spend, spend, spend to boost the economy. Got gold yet?
Is the US stumbling into a currency war?
The Fed is weighing how to push more money into the economy, and, given the central bank’s record, that’s bad news for the dollar. Gold, anyone?
As the country’s economic and financial woes refuse to recede, the worst-kept secret is that the Federal Reserve is going to engage in another round of quantitative easing, which I have come to refer to as QE2.
What actually is not known is what form said QE2 will take. “Fed mulls new bond approach,” a story in the Sept. 28 Wall Street Journal by Fed reporter (and mouthpiece) Jon Hilsenrath, suggested that our central-bank powers that be have not decided exactly how to implement its QE2. According to the article, any Fed action to push money into the economy would likely be on the small side, yet over a longer period, as opposed to a large, short-lived “shock and awe” approach.
Death by a thousand paper cuts
No matter how you look at it, the Fed’s track record has proved that the outcome will not be good news for the dollar. At first glance, this might appear to be an issue of concern only to Americans, but the news last week proved otherwise and perhaps a bit more.
Even more important than Hilsenrath’s article was an above-the-fold column Sept. 27 in the Financial Times headlined “Brazil in ‘currency war’ alert,” in which Brazil’s finance minister declared: “We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.”
The article notes that various countries (i.e., Japan, South Korea, Taiwan) had intervened to help weaken their currencies and acknowledges the generalized weakness in the dollar. The same issue of the FT also covered a large related story, “Hostilities escalate to hidden currency war,” so this is a phenomenon I suspect we will hear more about.
What quaintly was referred to in the old days as beggar-thy-neighbor policies of debasing one’s currency to benefit exports is certainly under way, and it will be illuminating to see what occurs on this subject at the Group of 20 global finance meeting in November. My expectation would be that this will be problematic and that it will be difficult for the attendees to put a smiley face on it. (Got gold?)
While all the talk of QE2 and currency issues might have been expected to prove beneficial to precious metals, their reaction to these articles was initially to yawn (actually, sink). However, something occurred in the gold futures market last Tuesday that is definitely worth noting.
A very well-connected friend of mine (and longtime commodity trader) called me that morning to point out that an unusually large trade had taken place very early in London to the tune of more than 8,600 futures contracts. As he noted, this was approximately a $1.1 billion sale, but, significantly, it didn’t really cause the price of gold to fall much (as it would have in the past). In fact, by the day’s end, gold had recovered all of that morning’s losses and gained 1%.
My friend brought this to my attention because the current sentiment seems to be that the gold market is crowded and that the first time a big seller appeared, the price of gold could be expected to drop $25 or $30 immediately and then go into an even bigger slide. Thus the fact that this huge trade could be absorbed so easily was an indication that the gold market was potentially deeper than a lot of people had thought (my friend included).
These conclusions are all sort of theoretical, but so is the thought that the gold market is crowded. Nonetheless, if a trade that size was on the up-and-up and not some completely coincidental bit of noise (which would be hard to imagine), it is bullish in the sense that it does show increased market “depth” in gold, contrary to what used to be the norm.
This development would be a big plus in attracting very large investors who may have been worried that the gold market was too thin (i.e., that it lacked the liquidity necessary) for them to get involved.
- Ashkenazi Jews are not the Israelis of the Bible. They are Khazars from the Caucasus region. Zionist Israel is Satanic, just look at their ’666′ flag!
1980 Jewish Almanac
“Strictly speaking it is incorrect to call an ancient Israelite a ‘Jew’ or to call a contemporary Jew an Israelite or a Hebrew.”
(1980 Jewish Almanac, p. 3)
The Jewish Encyclopedia:
“Khazars, a non-Semitic, Asiatic, Mongolian tribal nation who emigrated into Eastern Europe about the first century, who were converted as an entire nation to Judaism in the seventh century by the expanding Russian nation which absorbed the entire Khazar population, and who account for the presence in Eastern Europe of the great numbers of Yiddish-speaking Jews in Russia, Poland, Lithuania, Galatia, Besserabia and Rumania.”
The American Peoples Encyclopedia
… for 1954 at 15-292 records the following in reference to the Khazars: “In the year 740 A.D. the Khazars were officially converted to Judaism. A century later they were crushed by the incoming Slavic-speaking people and were scattered over central Europe where they were known as Jews.