Monday Sept 27 2010
Currency Wars
We
call your attention to Mish's
Global Economic Analysis today. The mid term elections loom, polls give
Republicans the edge, Democrat
candidates shun the President, the entire economic team has been sent packing
though they ‘resigned’ what to do?
Like any administration, blame the problem on someone else. And that is
precisely the latest strategy-blame China.
Please
click and read the column, no point in my recounting it but the idea is that if
only the Chinese currency were more valuable, the world would scurry to employ
more Americans. As Mish says this
presumes the world wants to pay us more more money to do what the Chinese do .
The real problem is that corporate tax rates in America are too high, there are
too many unnecessary costs with American workers like social security, there
are too many unfunded mandates in
pensions, and there is just too much uncertainty on what Congress might do
next, our case in point today.
This
sort of thing has a terrible history.
In a similar downturn in the early 1930s Congress passed the infamous
Smoot Hawley Tariff.
Then as now the idea was that foreign competitors had unfair advantages,
Congress would level the playing field. Historians agree that the tariff only
made things worse. Note the tariff
apparently stayed in effect until Bretton Woods in 1944. The article details
how much worse this made world trade.
Now
fast forward to the Fall of 1987. Then Secretary of Treasury James Baker was
hammering on Germany to lower its
interest rates. German, having weathered
the collapse of its currency in the 1920s, was not about to do that. Then as
now, the US viewed Germany’s refusal as the call to ‘do something about it.’ The stock market had been falling
already that month, the bond market had been falling since March 1987. Baker declared
that if Germany would not cooperate the US might just let the Dollar fall.
Experts later viewed this as a refusal of the US to defend its currency. That
following Monday
stocks crashed. This wiki article does not give Baker the
credit he so richly deserves for helping this happen. But the world took hat comment as
believing the US would not defend the dollar. Accordingly the world sold dollar
denominated assets, ie stocks.
Our
point here is that as always during periods of stagnation it is government
interference that often causes problems. This latest ‘we have had enough’ from
our biggest trading partner, and as Mish points out, buyer of Treasuries and
airplanes, is the latest in the history of government folly. This also helps explain
the recent collapse in the Dollar and UUP.
Bear
markets are a manifestation of negative social mood. Here is another example of
how mood results in precisely the wrong move at the wrong time. At least in
1930, the US was a net creditor. Now as a net debtor, such mistakes take on
even greater significance. This is especially so as the Chinese recycle our
Dollars back into US investments like Boeing.
We
are not publishing to predict an imminent crash. We put this out to highlight government interference
in a long history of other such failed attempts.
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