Side Effects: Beggar Thy Neighbor
Be forewarned: Economic war has been declared and is spreading around the world. In early February, the Venezuela government devaluated the Bolivar by 46.5 percent Venezuela’s actions reflected actions being taken elsewhere. Fortune’s Allan Sloan wrote recently about the side effects of the Fed’s QE1,2,3, policies: “The first Fed side effect, currency wars, is an example of how something good – stimulating our economy by lowering interest rates – can have a downside. Cutting interest rates faster and more deeply than most other central banks has weakened the dollar against the currencies of many of our major trading partners. The Fed doesn’t exactly run around telling the public that it’s happy to see this happen. But that’s the case, because a gradually declining dollar encourages job growth in our country by making our exports cheaper and our imports more expensive.” Sloan noted: “The new Japanese Prime Minister, Shinzo Abe, is pushing his country’s central bank to run down the value of the yen as part of his economic stimulus program. China is thinking along similar lines.” Bloomberg Businessweek reported:
The American Enterprise Institute’s Desmond Lachman recently noted: “As early as September 2010, Guido Mantega, the Brazilian Finance Minister, sounded the alarm about the dangers of a global currency war. He did so as his country was overwhelmed by a flood of capital inflows that pushed Brazil’s currency into the stratosphere with considerable collateral damage to the Brazilian export sector. He also did so as an increased number of emerging market countries resorted to inward capital controls in an effort to stem the upward pressure on their currencies. Provoking Mr. Mantega’s concern was the resort to highly unorthodox monetary policies in countries like the United States and the United Kingdom as well as the continued resort to currency manipulation by China aimed at preventing any undue appreciation of the Chinese renminbi.” Samuel Brittan recalled in the Financial Times: “The classic definition of beggar-my-neighbour policies was provided in 1937 by the British economist Joan Robinson. As Brittan wrote: “For any one country, Robinson argued, an induced increase in expors relative to imports lead to more jobs. In addition to the initial increase in employment, there is a secondary increase from the money spent by the newly employed workers. The snag, as she pointed out, is that an increase in the exports of one country leads to a decline in exports of other countries, ‘everything else being equal.’ At best ‘it leaves the level of employment for the world as a whole unaffected’ and probably reduces it.” Beggar thy neighbor is more politically palatable than support thy neighbor. As the Dilenschneider Group recently stated in Here We Go Again But Where?: “In the current environment, the risk of trade wars is likely to increase. This is so because debt problems in many industrialized countries have largely taken fiscal policy off the table as a way of stimulating growth. Similarly, important central banks are constrained from relaxing monetary policy because interest rates are already at close to zero. That leaves exports – trade – as a source of growth.” Germany Brings Home Its Gold
A "world historical" move? As The GATA Dispatch reports: "Lauren Lyster today interviewed fund manager and "Currency Wars" author James G. Rickards about the Bundesbank's attempt to repatriate some of Germany's gold, a move Rickards considers "world historical" in importance, confirming that gold is "the real base money, high-powered money."
This commentator is in complete agreement with Rickards that gold is "the real base money, high-powered money" and agrees that there are many signs that the world monetary authorities are giving respectful consideration to restoring the role of gold to its historical status of the real money base. The physical transportation of gold by the Bundesbank from beneath The Federal Reserve Bank of New York, 33 Liberty Street in New York City, back to Germany, however, is more likely to be administrative in nature. As the excellent Ambrose Evans-Pritchard wrote in the UK Telegraph: [T]he Bundesbank will announce on Wednesday that it intends to relocate the gold to vaults in Frankfurt, said by insiders to include parts of the old archive library. Germany has 3,396 tons of gold worth roughly £115bn, the world’s second-largest holding after the US. Most of the reserves were stored abroad for safety during the Cold War. The bank holds an estimated 45pc of its gold at the US Federal Reserve in New York, and 11pc at the Banque de France, lower than originally thought. A report by Germany’s budget watchdog in October revealed that the bank halved its holding in London a decade ago, a period when the Bank of England was selling part of Britain’s gold at the bottom of the market to buy euros. The gold was purportedly withdrawn because London was charging €500,000 a year in storage costs. The Bundesbank said part of 930 tonnes brought back was melted down for checks, and "not one gram was missing". It currently holds just 13pc of its total holdings at the Bank of England. The Bundesbank says there is little reason to keep gold in Paris now that Germany is reunified and at peace. The bank will retain some reserves in London and New York for trading and liquidity purposes. ... Many analysts say the world is moving towards a de facto gold standard again as China, Russia and other reserve powers boost their holdings to diversify out of dollars and euros. Unlike Britain, Spain, Switzerland, Holland and others, Germany did not sell any of its gold when bullion was out of fashion. Nor did Italy. The two countries are now sitting on very substantial reserves that are starting to take on political significance. Beware Falling BRICS
When leaders of the BRICS meet in Durban South The situation is worse among the four countries that comprise the BRICS. Morgan Stanley’s Ruchir Sharma recently noted in Foreign Affairs that “the rest of the BRICS are tumbling, too: since 2008, As the Economist recently reported: “For Brazilians, disappointing economic news just keeps coming. After weak third-quarter GDP figures shocked market economists and government at the end of November, both cut their predictions for growth in 2012 to just 1%.” “None of this should be surprising, because it is hard to sustain rapid growth for more than a decade,” noted Sharma. “The unusual circumstances of the last decade made it look easy: coming off the crisis-ridden 1990s and fueled by a global flood of easy money, the emerging markets took off in a mass upward swing that made virtually every economy a winner.” But reality – especially the reality of the developed world – has caught up to the BRICS and the developing world. “Without the easy money and the blue-sky optimism that fueled investment in the last decade, the stock markets of developing countries are likely to deliver more measure and uneven returns,” noted Sharma. The implications for world trade are stark, according to Sharma: “As growth slows in So, as the BRICS seek greater cooperation and the world seeks to restart economic growth, more than the mortar of good will be needed.
Perhaps it is time to try something different from the bad old policies or the ineffective new policies. "Tut! tut!" said Sherlock Holmes. "You must act, man, or you are lost. Nothing but energy can save you. This is no time for despair." The Jewel in Europe’s Crown is Tarnished
The blame game has been a popular game since the Great Recession began in 2007. Among the fiscal sinners in The German government now predicts growth in 2013 of 0.5% as export growth continues to stall. At the end of last year, the Economist predicted GDP growth for “Determined to avoid a repeat of the last election, the Social Democrats in September nominated the pugnacious Mr. Steinbrück,” wrote the New York Times’ Nicholas Kulish, “Never one to mince words, Mr. Steinbrück once called on other European countries to ‘use the whip” on Switzerland over its tax havens, likening the Swiss to “Indians running scared from the cavalry.” The Economist’s John Peet noted: “Mrs Merkel’s stubborn protectiveness of the German taxpayer is strongly supported at home. And that puts her political opponents in a bind. She has successfully sidelined would-be rivals on her own side, helped by personal approval ratings that are consistently higher than her party’s. Her coalition allies, the Free Democrats, are in the doldrums and may struggle to win the 5% of the vote needed to stay in the Bundestag. And the main opposition parties, the Social Democrats and the Greens, have found it hard to lay a glove on Mrs. Merkel.” Andreas Kluth, the Economist’s So don’t count out Mrs. Merkel. She’ll do better than the German economy. Rethinking Conventional Wisdom: A Monetary Tour d'Horizon for 2013
The year 2012 has come and gone, and so have many things that were once accepted as conventional wisdom. Let’s take a tour d’horizon and examine three ideas that bear rethinking in 2013. Rethinking the Money Supply I begin with the nonsensical way that most central banks, including the U.S. Federal Reserve, measure the money supply. Conventional wisdom holds that the best way to measure the money supply is to define the components that make up a particular measure of money (from M0 to broad M4) and then simply add up the components to obtain a total. More Articles...
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