German Pot Calls Japanese Kettle Black __ Is A Currency War In The Making?

Here is some insanity for you.

Let’s start with a refresher on what Quantitative Easing (QE) is. The good people at Investopedia will help us out.

Definition of ‘Quantitative Easing’

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

Investopedia explains ‘Quantitative Easing’

Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that, although more money is floating around, there is still a fixed amount of goods for sale. This will eventually lead to higher prices or inflation.

Here at Asylum Watch we define quantitative easing as counterfeiting.

The insane folks at the  central bank of the United States, the Federal Reserve, have been using a quantitative easing for four years in an effort to get our moribund economy growing again. They started with QE1 and when that didn’t work they tried QE2 and when that didn’t work they tried QE3, which didn’t work either. Because they are insane, they naturally started QE4.

Across the big pond, the European Central Bank (ECB) decided that what wasn’t working for the Federal Reserve would surely work for them, so they have  started their own counterfeiting quantitative easing operation.

Not to be out done, the Bank of Japan (BOJ), apparently has decided that quantitative easing would be a good way not to fix their economy, which has been sick for over two decades.

Japan entering madness should be good news for the US and the Euro Zone, because the central bank of Japan, JOB, will use their counterfeit money to pay the interest on their debt (over 200% of GDP, most of which was borrowed from the hard working Japanese at almost zero interest) and use the rest to buy US Bonds (now paying about 2% interest) and the new Euro Bonds (paying about 3% interest). Crazy like a fox, right? Everybody should be happy, wouldn’t you think? Not so.

Okay, enough snark. This stuff is serious. Here at Asylum Watch, we belive the world is made up of players and payers. We payers make up about 99.9% of the world’s population. The players are the people who have the power to run the world. One thing all players have in common is that they are control freaks. They love to micro-manage everything and central bankers are no different.

If central bankers really believed in the free market, the goal of every country’s central bank would be to manage the money supply to balance with supply and demand. In other words, they would try to manage the money supply such that there would be neither inflation or deflation. That would be impossible to achieve in the real world. So there would be times of deflation and the central banks would put more money into the economy to satisfy the demand. If they find they have to much money in circulation there would be inflation and the central banks would begin to destroy some of the currency ti try to bring supply and demand back into balance. If they were good at their jobs, the economy of each country would oscillate between being slightly deflationary and slightly inflationary. If central bankers believed in the free market system, they would allow the market to determine the foreign exchange rates and interest rates. But, central banks are more interested in protecting the interest od banks than they are in protecting the interest of the country they are supposed to be serving. Bankers hate deflation. Deflation is the only  thing that can destroy their wealth. Therefore they always work to maintain the money supply with more money than demand would dictate;i.e., their policy creates inflation. So, despite what economist Paul Krugman says, quantitative easing will lead to inflation sooner or later.

The thing you need to understand about the players is that the central bank players are the most dangerous player of all. It doesn’t happen very often, but, when in fighting occurs between the central bank players, things  can get real dicey for the payers  and we need to pay attention. Today’s title refers to may grow into some serious in-fighting between central banks. The risk is it could lead to a currency war.

According to this CNBC article, there may be some trouble brewing. A German policy maker at the ECB, Jens Weidmann, is not happy that BOJ has is jumping on the quantitative easing bandwagon.

Weidmann is the latest in a string of policymakers worldwide to warn of the threat of a “currency war” as central banks pump out cash to support their economies, reducing their value in the process.

{…}

“Already alarming violations can be observed, for example in Hungary or Japan, where the new government is interfering massively in the business of the central bank with pressure for a more aggressive monetary policy and threatening an end to central bank autonomy.” (Bold added)

Weidmann is claiming that another player, the political elite of Japan, are interfering with the central bank player of Japan, BOJ. What we don’t is if this claim is perception or real. Japan’s new Prime Minister, Shinzo Abe, has publicly advocated for increasing inflation in Japan through quantitative easing to weaken the Yen and, thereby, make Japanese exports, cheaper in world markets. The article offers no information about the position of BOJ. It may have succumbed to pressure and it may have agreed with their Prime Minister. Weidmann goes on to say:

“So far the international currency system has come through the crisis without a devaluation competition, and I hope very much that remains the case,”

Hmmm! Apparently Mr. Weidmann believes that quantitative easing only causes inflation if the stated reason id to cause inflation. Really? I’m not buying that, are you?Right or wrong, Weidmann is not alone. This MNS article says:

Mark your calendars. Today is the day the global currency war broke out into the open. This after the Bank of Japan announced it would ramp up its monetary policy stimulus efforts — on an unlimited basis — until it achieves a 2% inflation target.

Now, all three major central banks have committed to open ended easing.

As central banks ramp up one last time, the end game for all this — given the fiscal austerity, budget fights, and policy turmoil just ahead — is higher inflation combined with economic stagnation. This is the dreaded “stagflation” outcome that is the bane of central bankers, especially the aggressive, overconfident ones that are in charge right now. Here’s why.

Russian officials warned that other countries may follow Japan’s efforts to weaken the yen — something that reverberated after the outgoing head of the Eurogroup of finance ministers and the Prime Minister of Luxembourg said the euro was “dangerously high.” Officials and Norway and Sweden also expressed concern. Other officials, from the head of the Bank of England to policymakers in Korea and Australia, have all recently voiced their concern about what’s happening.

Stay alert, my friends, A currency war could be very costly for us payers.

Well, that’s what I’m thinking. What are your thoughts?

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16 thoughts on “German Pot Calls Japanese Kettle Black __ Is A Currency War In The Making?

  1. Germany has been the main beneficiary of a deeply overvalued Euro because they entered it originally under an undervalued ratio to the German Mark.

    They are now, however, the only ones putting a dike against the inflationary policies of the European Central Bank, the American Fed, and now, the Japanese Central Bank and its government. Germany is managing to reduce taxes, control the expansion of their welfare state, and contain their deficits. On the other side, the Japanese have lost their bearing, suffering from 20 years of deflation, they are desperate, and their inflationary new policy is a desperado move.

    In the mean time, if the Japanese move devalues the Yen it will increase the American trade deficits which will increase our borrowing requirements at a bad time.

    It seems that there is a free-for-all brawl developing, increasing the chances of world inflation. The sure beneficiaries will be gold and most commodities.

    1. Angela Merkel and the German parlament didn’t listen the advice of the Bundesbank. They voted to give the ECB the power to do quantitative easing. Trade deficits are the price America pays for having the dollar as the international reserve currency. But, the dollar being the world’s reserve currency, is the only reason the interest rates on US bonds is like that of Greece. I need to do another post on that.

  2. And while they do all this, they use counterfeit money to short the precious metals market. It is a fascinating conspiracy- perhaps the biggest ever conducted. A global conspiracy with only two common denominators. Greed and lies.

    I can’t wait until they bulldoze this smoldering wreck off a cliff. Truly, I can’t

    1. You’re welcome, Steve. It is not that I understand these things any better. It is that I have the advantage or curse of being able to spend ten to fourteen hours a day on the internet reading. That is how this old man spends his days.

  3. Under normal conditions a nation’s economy grows as its population grows. Ideally, to maintain price stability, that means the money supply needs to increase as well.

    If the money supply is not increased then inflation occurs. There are too few dollars chasing too many goods and services.

    The money supply in an economy should be balanced with the increase of goods and services.

    That should be true for the global economy as well.

    When a country like Japan upsets the balance of global money supply to benefit itself at the expense of others then it forces other countries to react. That causes currency wars to keep international trade balanced properly.

    Weird is that the U.S. and Japan are both using QE, but for two different reasons. The U.S. is trying to use it to meet a 7.5% unemployment target. Japan is using it to meet a 2% inflation target.

    Can either work? Nobody really knows. They both will have unexpected (negative?) international consequences.

    The U.S. Fed is already at the zero boundary limit then it seems like its QE policy can’t possibly work. There is already plenty of money out there. Our problem is that it isn’t being spent… adding more shouldn’t help.

    But since the U.S. dollar is the currency of world trade then our QE necessarily must have some sort of international effect… and it probably won’t be good for the rest of the world.

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