Posts filed under “Currency”
Euro: Requiem or Renewal?
David R. Kotok
March 30, 2013
In the last several weeks, a sequence of events involving Cyprus has triggered serious questions about the sustainability of the European Monetary Union (EMU). The events surrounding the finance ministers’ decision to levy taxes (i.e., partially confiscate deposits) on depositors in a Euro-system bank led to a sequence of blunders that have been well-recited in the press. There is no need to repeat the details here.
For readers who missed it, I do want to add this link to the personal observation of Edward Scicluna, finance minister of Malta, who was appointed by his country’s prime minister on March 13. His first action was to participate in the notorious Eurogroup meeting on Cyprus. See: http://www.timesofmalta.com/articles/view/20130319/opinion/cyprus-a-lesson-for-life.462258 . Source: www.timesofmalta.com , March 19.
In the Cyprus affair, we observe a defeat of the concept behind the Eurozone and the original European Union. It took half a century to create the European Union after WWII. The driving force was what the French call a “rapprochement” between formerly antagonistic parties. To put it simply, the Germans and French decided to stop killing each other after a thousand years of war. An economic union seemed the right way to go about attaining peace and prosperity. After centuries of destructive inflation outcomes, they realized credible money was absolutely necessary for this peaceful outcome to succeed.
Charle Hugh Smith is an author. He blogs at Of Two Minds.
If we shed our fixation with the Fed and look at global supply and demand, we get a clearer understanding of the tailwinds driving the U.S. dollar higher.
I know this is as welcome in many circles as a flashbang tossed on the table in a swank dinner party, but the U.S. dollar is going a lot higher over the next few years. For a variety of reasons, many observers expect the dollar to decline against other currencies and gold, the one apples-to-apples measure of a currency’s international purchasing power.
The tailwinds pushing the dollar higher are less intuitively appealing than the reasons given for its coming decline:
1. The Federal Reserve printing another trillion dollars (expanding its balance sheet) will devalue the dollar because money supply is expanding faster than the real economy.
2. The Fed is printing money with the intent of devaluing the dollar to make U.S. exports more competitive globally and thereby boost the domestic economy.
Let’s examine each point.
1A. If much of the Fed’s new money ends up as bank reserves, it is “dead money” and not a factor in the real economy. Fact: money velocity is tanking:
1B. Money is being destroyed by deleveraging and writedowns. This is taking money out of the real economy while the Fed’s new money flows to banks.
1C. The purchasing power of the dollar is set by international supply and demand, not the Fed’s balance sheet or the domestic money supply.
February 11, 2013
“Currency War” is the latest hot title. It’s now on the front pages, triggered by the policy change in Japan. In only two months the Japanese yen has weakened about 15% against the US dollar.
Let’s reflect on this important development.
First, a simple case study. Suppose there were just two countries and just two currencies. Suppose country A decided to try to weaken its currency so it could sell more stuff at cheaper prices to country B, thus undercutting B’s domestic producers. B could resist by raising a tariff on the incoming stuff that A was trying to sell. Or it could retaliate by cheapening its own currency to counter the price differential. The first form of retaliation is a trade war; the second is a classic currency war. The economic history of the 1930s is replete with examples of each and combinations of both. History shows us that the results were disastrous for the global economy and led to a world war.
But is there a third alternative? What about the role of interest rates?
War Games By Grant Williams January 29, 2013 The Asian currency crisis of 1997 contained the seeds of an East vs. West currency conflict, but catastrophe was averted, despite the damage that was done to the US deficit and the seeds that were sown for a decade-long war of words between the US…Read More
click for ginormous chart Source: FT Alphaville Fantastic annotated chart from Morgan Stanley by way of FT Alphaville
The Australian Central Bank, the RBA stated that it had increased sales of the A$ last month to a number of buyers, including foreign central banks. The sales amounted to US$500mn, the most since June 2009. The A$ declined on the news – currently US$1.0337. For full disclosure purposes, I remain short the A$, against…Read More
From start to finish of the 2008-2012 term the USD only lost approximately 3% to the Euro. There’s been quite a few 20% moves in between making it challenging for both buyers and sellers.
As a reminder, the Dollar’s Biggest Decline was from 2001-08 — down 41%
Nov.6, 2012 Election day, trading at approximately 1.28