Why we should worry about currency-warring politicians

Currency wars

It’s very flattering when ‘important’ people agree with you.

For years, my UK Uncensored articles have been littered with grumbles about politicians. And in recent days, both the former-MI6 boss as well as the (also now-ex) UK ambassador to the US have expressed similar sentiments.

If they’re right in their assessments, the future of politics on both sides of the Atlantic doesn’t look very bright.

That’s concerning enough in itself. But as those politicians decide to fight the next round of currency wars, we all have reason to worry about the global economy…

Political nervous breakdown

The UK is presently suffering from a “political nervous breakdown”. That’s according to Sir John Sawers in an interview with the BBC.

As Sawers is a recent head of our foreign intelligence service MI6, his opinion carries more weight than most. His job is all about gauging threats to our national security. And if he concludes that the UK could soon have a Tory prime minister who does “not have the standing that we have become used to in our top leadership”, that’s not a great endorsement of the candidates for Britain’s top political job.

Nor has Labour leader Jeremy Corbyn escaped censure from bureaucrats. The Times recently quoted ‘unnamed senior civil servants’ who have suggested that he’s “too frail” to become PM “physically or mentally”.

Now Sir John Sawers is very anti-Brexit, so his comments need to be seen in that light (I know that plenty of you will disagree with him).

Yet the latest furore about remarks made about Donald Trump by Sir Kim Darroch, the now-resigned UK ambassador to the States, were nothing to do with Britain’s impending departure from the EU.

His 2017 doubts that the US President’s administration would “become substantially more normal; less dysfunctional; less unpredictable; less faction-riven; less diplomatically clumsy and inept” amid rumours of “infighting and chaos” in the White House were never intended for public airing. But they show the same dislike of, and wariness about, politicians that I’ve long articulated.

(I’m not getting into the row about whether Boris should have backed Sir Kim: that’s a rather lame attempt to politicise a serious security lapse. Maybe MI6 could help us out here by finding the culprit!)

My point, though, is that these examples of high-level confidence losses in both current, and potential, US and UK political leaders are worrying enough in any case.

But with politicians worldwide now driving the next round of currency wars, it’s clear why global economic jitters are rising…

What are currency wars all about?

Anyone who’s read the writings of my colleague Jim Rickards will be well aware about the specifics of currency wars.

But in case you haven’t, they can be summed up in just three words.

Ongoing competitive devaluations.

What does this mean? If a country manages to lower the value of its currency, its exports will become cheaper while its imports will cost more. This process improves that country’s competitiveness and trade balance, thus creating higher profits and more jobs on the home front.

Trouble is, foreign exchange (FX) markets are a ‘zero sum game’. If one currency falls, others by definition must rise against it. For countries that experience a climbing exchange rate, exports will become more expensive while imports will cheapen. The net result will be lower domestic profits and fewer jobs.

In other words, most politicians (we’ll leave those in ‘strong-franc’ Switzerland out of this for the moment) want their national currencies to depreciate in order to improve their countries’ competitive positions.

Currency wars won’t solve the world’s economic problems. But they’re a shorter-term solution to currying favour with electorates.

For a while, President Trump quite liked a strong dollar as a sort of national virility symbol. But when he clocked how much damage it was doing to American industry, tariffs became the order of the day, along with ‘jawboning’ the dollar’s value down.

For the States, the numbers are distinctly ugly. Last year Uncle Sam recorded an overall trade deficit of $625bn. That compares with China and Japan logging 2018 surpluses of $100bn and $10bn respectively. But the real issue for Trump is the Eurozone. This ran up a mammoth 2018 surplus of $600bn, equivalent to more than 4% of the region’s GDP.

To make matters worse, several European politicians want the euro to be still cheaper than it is today. And following its latest indications of easier monetary policy, the ECB looks set to oblige.

China, meanwhile, is trying to offset the effect of Trump’s tariffs with a progressive devaluation of the yuan. No wonder that, according to CNBC this week, President Trump has asked aides to find a way to weaken the dollar in an effort to boost the US economy before the 2020 election.

Race to the bottom

It’s like a race to the bottom. And the only way to ‘win’ will be to cut interest rates further and print more of your currency via measures such as quantitative easing (QE, i.e. debt monetisation) than the ‘opposition’ does. Hardly a success!

Where does this lead? There’s another reason why such a currency war downward spiral may develop.

“The recent slide in US ISM manufacturing new orders relative to inventories warns us of a sharp and imminent GDP slowdown, as does recent weakness in Gross Domestic Income”, notes Albert Edwards at Societe Generale.

“I believe the US will soon be forced to join the Eurozone and Japan in aggressively fighting deflation. Unlike in the Eurozone, it’s absolutely unambiguous in the US who has the call on FX intervention – the Administration and not the Fed. As well as the US directly intervening in FX markets, one policy tool I believe will be weaponised is negative Fed Funds.”

Last week I ranted about group-think globalists running central banks. This week my moans are about currency war-propelling politicians who are distrusted by their own bureaucrats. Yet both crowds are ultimately targeting the same things: devalued currencies and negative interest rates, i.e. the same old methods that have failed before. For the global economy, this won’t end well.

You may like

In the news
Load More