Who’s the fairest manipulator of them all?
Hint: Perhaps it’s not China …
Yeah, China gets a bad rap for being a “currency manipulator.”
That’s because China has been trotted out by American politicians as a boogeyman we must fear. Except that the elites are manufacturing our fear to justify their foreign-policy egressions … or aggressions, if you prefer.
Sure, China does deserve some attention for its intentional currency management that supports its export-intensive growth model.
But is China the biggest offender?
By population size, yes. But there is perhaps another nation (and I’m not talking about Japan) that helped put currency manipulation on the map …
Who is ‘Sticking It’ to Whom?
After World War II and in the era of Bretton Woods and the Marshall Plan, the U.S. agreed to back dollars with gold at a rate of $35 per ounce. And then it set pegged exchange rates with war-torn countries. These were intended to be favorable and promote rebuilding.
Now, one could argue the Bretton Woods agreement and the Marshall Plan amounted to an economic hit job — or at the very least a generous subsidy — that would help grow U.S. foreign policy influence in Europe.
But the U.S. owned two-thirds (63%) of all the world’s gold as of 1944.
That’s when the gold began flowing overseas …
The Bretton Woods agreement required that European nations whose currencies were pegged to the U.S. dollar would revalue their currencies once their economies had recovered from war.
So, the period of rebuilding naturally amounted to a balance-of-payments deficit for the U.S. public sector … and a balance-of-payments surplus for those currencies of nations receiving U.S. dollars.
At the same time, U.S. grants and aid to facilitate the rebuilding efforts meant even more dollars went overseas.
Eventually, the time had come where the countries and economies of Europe had stabilized and rebuilt. That also meant the time had come to revalue their currencies.
Instead, they took the dollars that had been flowing from America and chose to convert them to gold. Something of which European countries had very little.
By 1970, the monetary gold owned by the U.S. had more than halved.
|Source: St. Louis Fed|
Germany being Germany
I have a friend whose wife is German.
He recently made the claim that Germans are just, well, German — that they have their way of doing things and that’s the way they’re going to do things.
Fair enough, I guess.
I suppose one could apply that blanket statement to how Germany manages its economy …
What happened after the gold-backing of U.S. dollars was stripped away in 1971? A sudden, voracious appetite for U.S. dollar-based assets.
Europeans had dollars to spend, so they sent them to America. The capital sent to the U.S. was then deployed in through consumption — through trade where Americans were financially stimulated to increase purchase of European goods and services.
European countries proceeded to develop a persistent trade surplus with the U.S.
To this day, Germany has stuck to this model.
And it’s done so necessarily by hoisting capital surpluses and, thus, trade deficits onto its neighboring European economies. Thanks to the complexity of the euro system, the actual accounting of these trade transactions between Germany and the European debtor nations is a little convoluted.
Suffice it to say, Germany has the means and the intentions to maintain the current trade dynamic within Europe.
A Currency War to Solve All Currency Bickering?
I don’t know about that.
Many like to warn that President Trump is on the verge of inciting a trade war and, thus, a currency war.
But chances are (hopefully) that it’s about more than just a lofty U.S. dollar. After all, the global balance of trade and balance of payments is about more than just exchange-rate valuations.
To be sure, it is about capital flows and U.S. dollar reserve accumulation that prop up and perpetuate export-dependent growth models.
A trade war could certainly shake things up. But must it be accompanied by an explicit currency war?
I’m not so sure about that.
What is most intriguing, to me, is how Trump’s stated intentions will mix with what everyone’s come to expect from the U.S. Federal Reserve …
That is, the Fed has become a proxy central bank/lender of last resort for the entire world. They need to provide sufficient U.S. dollar reserves that grease the flow of capital and the wheels of existing growth models. So, can Trump’s efforts coincide with a Federal Reserve that is tightening monetary policy?
It seems to me that is a recipe for disaster … one that leaves the U.S. in a much-better position to weather a major financial crisis.
If it can happen, that is.
Basically, I have come to acknowledge the grip that policymakers have on the perception of global investors and consumers. So, it would seem to me that Trump is more likely to ease up on the saber-rattling and let the Fed adjust policy by walking back its rate-hike intentions as needed.
The simple takeaway, albeit the typical takeaway, is that gold will be the beneficiary.
Gold is expected to do well as the U.S. dollar inevitably responds to low interest-rate expectations in the U.S.
This could look like inflation or a cap on U.S. interest rates or both. But the realization that the Fed is stuck could dictate the market sentiment and the likelihood of a trade war.
It’s certainly entertaining out there.