• 345 days Will The ECB Continue To Hike Rates?
  • 345 days Forbes: Aramco Remains Largest Company In The Middle East
  • 347 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 746 days Could Crypto Overtake Traditional Investment?
  • 751 days Americans Still Quitting Jobs At Record Pace
  • 753 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 756 days Is The Dollar Too Strong?
  • 757 days Big Tech Disappoints Investors on Earnings Calls
  • 757 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 759 days China Is Quietly Trying To Distance Itself From Russia
  • 759 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 763 days Crypto Investors Won Big In 2021
  • 764 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 764 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 767 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 767 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 770 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 771 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 771 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 773 days Are NFTs About To Take Over Gaming?
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

  1. Home
  2. Markets
  3. Other

Global Currency Meltdown

As the recession and resultant stimulus packages add to higher unemployment and increasing public-sector deficits, the government is seeking to boost the value of overseas earnings that are accrued by US corporations. To aid in this effort, the Fed is being pressured to erode the value of the US dollar, thereby making foreign sales more lucrative in nominal terms. But this form of stealth protectionism will fail just as surely as more overt trade barriers.

Like all commodities, the relative value of currencies is influenced by reward, risk, and future expectations.

The interest rate earned by holding a particular currency represents the 'reward' end of the equation. Assuming similar risk profiles, money tends to flow towards the currencies with higher interest rates.

Relative risk is in the eye of the beholder and often is difficult to quantify. In the main, investors view a nation's balance of payments deficit as a major risk factor in evaluating the relative value of its currency.

Another long-term measure of risk is government debt as a percentage of Gross Domestic Product (GDP). If a large national trade deficit is accompanied by a relatively large debt-to-GDP ratio, the level of risk is increased.

Given the current state of the global economy, it should be clear to all that the US dollar is being priced higher than is warranted and the Chinese yuan is priced lower.

For over a decade, China has exported into an American market that was open and receptive to cheap products. In response to the demand for these new products, the Chinese yuan should have risen sharply against the US dollar to balance the massive Chinese trade surpluses.

However, the Chinese have pegged the yuan to the dollar, preventing a natural rebalancing of the two currencies from taking place. Not only has this generated a politically dangerous and economically unsound trade imbalance, but it has made the dollar appear stronger than it should, given the frail state of the American economy.

Left alone, internal pressures and common sense would have driven the Chinese government to eliminate the peg. To understand why, consider this: even if China didn't accept one more dollar, any attempt to spend its massive reserves would cause the dollar to drop like a stone. How long should we expect them to keep digging themselves into this hole?

Unfortunately and quite predictably, Washington isn't allowing the market to naturally correct. Instead, the Fed is attempting to devalue the currency by the printing press. Now we can expect not only the deluge of foreign exchange reserves to flood our economy, but also additional dollar tsunamis emanating from our own central bank. This makes a tragic situation worse, and risks instigating a full-blown trade war between the world's largest consumer and its largest producer.

Meanwhile, other countries whose economies are heavily dependent on trade, such as Japan, Switzerland, and South Korea, are finding their exports hit hard by the simultaneous devaluations of the US dollar and the Chinese yuan.

On October 2nd, the Financial Times (FT) headline was: "France Pushes for Currency Accord". It was reported that even China was supportive of the French initiative. Then, on October 5th, the FT headline was: "Call for Global Currencies Agreement". This time the call was from a group of some 420 of the world's leading bankers. Finally, on October 6th, the FT headline was: "IMF Chief Warns on Exchange Rate Wars". Clearly, certain government leaders and bankers are aware of the risks of competitive currency devaluations. The question is whether parliamentary politicians will support currency stability in the face of increasing recession. The two most influential central banks - the Fed and People's Bank of China - certainly aren't setting a good example for the rest.

Only when currencies are allowed to float freely will trade imbalances be corrected. Washington's attempt to force the issue is only doing harm to the world economy by introducing uncertainty and punishing the prudent. The Fed has gone radioactive, setting off a global currency meltdown. Perhaps only gold can truly shield investors from the fallout.

 


Please note: Opinions expressed are those of the writer. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money.

For in-depth analysis of this and other investment topics, subscribe to Euro Pacific's Global Investor Newsletter. Click here for your free subscription.

Click here to download Euro Pacific's Special Report: My Five Favorite Gold & Silver Mining Stocks.

Be sure to pick up a copy of Peter Schiff's just-released economic fable, How an Economy Grows and Why It Crashes. Click here to learn more and order.

 

Back to homepage

Leave a comment

Leave a comment