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Currency Wars - The EndingNobody really knows who coined the term "Currency War" but it is most certainly appropriate considering what von Clausewitz said: "War is a continuation of politics by other means".

POLICY I

The original policy sought through currency wars was simply to export more (i.e. the "Mercantilist" economic theory). The idea was simple; the more you export the richer you become. The currency principle was also simple: the more you print the cheaper your currency becomes and the more you export. This is so because there is a time delay between your costs rising up and your currency dropping in value. As government prints, the currency drops in value relative to other currencies. As such, for people buying your products from other countries, they are "cheap". Let's say that you manufacture in Brazilian Real (BRL) but you buyer uses Indian Rupee (INR). The current exchange rate between BRL to INR is 1:26. Now your Brazilian government decides to become "more competitive" and devaluates the BRL by 50% and so the exchange rate is now 1:13. In other words, you can only buy half the stuff you could before the devaluation. But the opposite is also true for Indians. In order to buy the same amount of stuff as they could before the devaluation they now need to spend only half the amount of money. And so your product just became "cheap" for them. But this effect happens with all the currencies around the world, which means that your products just became 50% cheaper everywhere. Magic!

Well…no.

There are several problems in so doing. The first is that yes, you will export more, but at the same time people that need imports will now have to pay twice what they were paying before. Also, since your government is now printing, this printing has a name; it is called inflation. And so, again, yes, you will export more but the prices of your raw materials and other costs will go up… which will prompt you to rise your prices thus invalidating all the previous printing…which will prompt the government to print more and on, and on, and on with no end in sight. This will happen but there is a delay between the drop of exchange rate and the rise of inflation. It will take approximately 6 months for inflation to catch up. But you will be profiting handsomely during those 6 months.

And then we also have the reaction of those "other" countries that find your goods so "cheap". It so happen that while your "cheap" goods may be a good thing for their people, this "good thing" does not last long. This is so because their people is not buying from their industries because they are buying from you. And so their industries tank. Also, because your goods are so cheap, other countries prefer to buy from you than from them. Which means that now they can't export either! Of course, their government will "do something about this" and this "something" is to devaluate their currency to match or surpass your devaluation hence reversing the situation and gaining on you. That will teach your government!

Well…no.

Because your government will devaluate in response to their devaluation which will prompt a further devaluation from them which will be met by one more of your devaluations which will trigger… got the idea? This is called a "Currency War" It is a race to the bottom. He who destroys its currency first wins!

What?

This can't be right!

Well, yes and no.

Central Banks can't fully destroy their currencies however hard they may try. Consider that even a bill of 1 Trillion Zimbabwe Dollars had some value (see Alpha And Omega). However, they can and they will totally destroy your economy. As they print they move from inflation to hyper-inflation to crash and depression. Game over.

POLICY II

Through two centuries of making your economic and financial life miserable through these games, many countries (but not all) have concluded that to do so is pointless. A little bit of devaluation (2 to 3% per year) is OK, but anything beyond that is counterproductive. Of course this is just plain stupidity because inflation is inflation is inflation and it is bad and counterproductive at any level (see for example Inflation Inflation Inflation). And so a little inflation is not as bad as a lot of inflation. This is the real truth. But we digress…

However, what happens when your economy is tanking because of all these centuries of "managed" economic policies? You need to reactivate it at any cost and this means printing. Of course the official story and policy will be that you are printing to avoid deadly deflation; deflation being re-defined as an economic catastrophe and not as the normal state of a healthy free market economy.

As a consequence of your printing you will get "healthy" levels of inflation but when this happens your neighbour's economy will tank because of your exports. When this happens, your neighbour country will go into "deflation" and this will prompt them to print more. This is called the second Currency War or CWII.

SEWER (suːə) and SEWER (suːər)

And so in the twisted and hallucinogenic reality where monetarist economists live, printing is now not about Mercantilist economic principles but about exporting deflation to your neighbour. Whatever.

Does it really matter how you call printing? The effects are the same regardless of the label you use and they are always not good by any stretch of the imagination.

The problem is, of course, all the retarded and idiotic concepts that economists keep spewing from their mouths such as that deflation is a consequence and a contributor to the current recession. Again, if they keep re-defining deflation as economic catastrophe, we fully agree but in so doing this tells us nothing about the real origins of the problem. For that, we need to go back in time to the years before 2008, during which Alan Greenspan (the US Federal Reserve chairman) kept interests rates very low for so long that they triggered a massive real-estate bubble that contaminated the world. This is the real origin of the current so-called "deflation"; massive printing in US before 2008. Which, of course, leads to an interesting conundrum that all these economists can't answer. That the real origin of current deflation (i.e. lack of sufficient currency printing) is actually currency printing! And so we come to the brilliant conclusion that: Printing triggers lack of printing which requires more printing to be solved. F&P

Does this compute for you? At all? At any level?

Of course it does not. Yet, you would be surprised how many people swallow this stupidity in their entirety.

SCORCHED EARTH

Currency Wars produce nothing but scorched and sterilized earth just like any other war. The only difference is that they act a little bit like neutron bombs. They kill everybody while leaving true wealth intact and ready for the taking. CWII is just like any other previous CW and will end in the same manner; with a gigantic economic catastrophe. Of course, we don't know how big this debacle is going to be. The only thing we are sure about is that the more involved a country may be in it, the worse it will be. So far the winners of this race towards destruction are Japan and West-EU while this plague continues to move towards the East-EU. US is already done and there is nothing that can be used to prevent the upcoming debacle. Unfortunately, idiotic Central Bankers will try to fight "deflation" by whatever means necessary and this means printing. Welcome to the new era of World-Wide Stagnation until spending resumes and at that time we will enter into a new dawn of Stagflation. Hope you enjoyed the 70's because this is going to be nothing short of a magnificent remake!

CONCLUSION

Currency wars are nothing but the old unholy trinity being shifted from the first tool to the last tool; this is from taxation through borrowing to printing. Here is a tip: it is not going to work. There is absolutely zero chance it will work. There is nothing but misery in the horizon for the foreseeable future. CWII is nothing but a very old and very obsolete recipe…for disaster. Hope you will enjoy the dish because it was brought to you by the usual suspects, the politicians you voted into power.

But then again, this may only be a figment of our imagination and the last 200 years worth of economic history was just a hallucination. Who knows, maybe alchemists were right after all and blindly repeating a failed procedure time and time again like brain dead monkeys may finally pay off. You should be OK with this because the only thing at stake is your future.

Note: please see the Glossary if you are unfamiliar with certain words.

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