3 Currency War Means - Dow Plunges Over 700 Points on Currency Wars - Got Gold?

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Trump officially accuses China of being a "currency manipulator". The market is not taking the message well.

Trump Tweetstorm

Currency Wars

The market seems to fear currency wars. At least that is how mainstream media views things.

Actually, currency wars have been going on for decades disguised in other forms.

Currency Manipulation Means

  1. Direct Currency Intervention
  2. ZIRP and NIRP
  3. Quantitative Easing

ZIRP stand for Zero Interest Rate Policy. It younger brother is NIRP, Negative Interest Rate Policy. Their parent is central bank interest rate policy which tends to be asymmetrical in favor of easing over tightening.

All three methods are means in which central banks engage in currency wars. Yet, only point point number one is widely recognized as such.

War Raging for Decades

Properly understood, currency wars have been raging nonstop for decades.

Continuous trade wars go back to August 15, 1971. That's when Nixon closed the gold window allowing central banks to print money at will and governments to spend at will with no effective brakes other than inflation.

Total Credit Market Debt Owed (TCMDO) now stands over $72 trillion dollars.

Nonstop Inflation

Inflation has been nonstop, and much higher than reported because governments and economists do not see asset bubbles, inducing housing bubbles as inflation.

The result is the third major bubble since 1999.

Trump Accuses China of Currency Manipulation

Trump is correct.

China directly manipulates its currency. So does the Swiss national Bank and so has the Bank of Japan.

Indirect Manipulation

Indirectly the Fed sought a cheaper US dollar with ZIRP and QE policies which the EU soon followed.

The EU is now the global leader in NIRP and QE.

Yaun Manipulation

China does not allow the yuan to float.

The yuan may be hugely overvalued and could crash if China actually floated it. Chinese State Owned Enterprises (SOEs) are all bankrupt, and Chinese banks are in worse shape than US banks.

Periodically, China has artificially strengthened the yuan and capital controls to stop capital flight.

So what would happen if China simultaneously floated the yuan and stopped capital controls? A crash perhaps?

If so, Trump would get the opposite response that he wants.

Global Currency Wars

The important point is not Yuan manipulation per say, but a major step up in currency wars led by the EU and China.

Trump wants the US to join the party.

The Fed will do just that, forced by Trump's tariff policy and actions by the ECB.

How to Stop the Wars

Stopping the currency wars (and trade wars at the same time) is easy enough in theory. Revert to the gold standard.

But expect the opposite: More financial repression and more NIRP led by the EU and Japan with Trump pressuring the Fed to follow.

Gold vs Faith in Central Banks

Got Gold?

If you believe faith in central banks has peaked this cycle, acting on that belief should be easy.

Meanwhile, please note that a Global Manufacturing Recession Has Started.

The trade war escalation will make matters far worse.

Recession is at hand.

Mike "Mish" Shedlock

Comments (39)
No. 1-12
Sechel
Sechel

Every country can't win the currency war. Nobody wins a race to the bottom. U.S. thinks this is a way to make labor more competitive but it raises inflation and the cost of goods imported into the U.S. while raising the price of raw materials needed for production.

Mish
Mish

Editor

Correct Sechel

Casual_Observer
Casual_Observer

In the end we are headed for more deflation because of a capital crunch and currency devaluations. I don't think the gold standard is the answer either. Deflation will help more people than it hurts but in the end it will end in tears for many too because unemployment will rise significantly.

Tony Bennett
Tony Bennett

"Trump is correct.

China directly manipulates its currency. "

...

Yep. Just calling a spade a spade.

Have to laugh thinking back on Tim Geithner. During his confirmation hearing (Jan 2009) got asked the litmus test question of whether China manipulating. Answered: affirmative. Well. lo and behold, "they" told him how things work. When hearing continued later he had pulled a 180 - no manipulation.

RayLopez
RayLopez

Headline: "Trump no officially accuses China " should read "NOW" not "no". And yes I got gold! And SLV!

frozeninthenorth
frozeninthenorth

Every country see's its currency as a mean of cheapening its export and increasing the price of import, at heart politicians are mercantilist and there's really not much more to say than that.

I think that China is "holding up" its currency because, worse than Japan, so many of its companies are "zombies" requiring more and more borrowing to meet their expenses.

Mish, it has been said that only one country every wanted a strong currency -- the Americans -- the strong US dollar allowed America's imperialist ambitions to flourish. Now all that is getting in the way of a mercantilist President!

I cannot remember from my history lessons but I think the UK had similar policies prior to WW1 (but I could be wrong on that one); economic history was a long time ago!

abend237-04
abend237-04

There is no short term solution to the China trade dispute. Picture kids sitting in a fuel tank negotiating fire prevention tactics and strategy. Trump just struck a tariff match to provide more light on a subject that's been festering since the dawn of the Deng era, 1979... I think a severe recession, 50% market roll-off and three years should bring us back to where we are...nowhere without the Gold standard. Politicians just can't help themselves.

JonSellers
JonSellers

"Stopping the currency wars (and trade wars at the same time) is easy enough in theory. Revert to the gold standard."

Easy in theory. Completely and utterly impossible in reality.

caradoc-again
caradoc-again

Close to pushing every territory into a depression.

everything
everything

Healthy pullback! Imagine how Chinese people feel about devaluation, no wonder they buy gold en-mass, apartments, anything tangible, etc., more than India, and lol, now India buys more silver coin/bar than the U.S. We are still just one planet.

Webej
Webej

For America to complain about currency manipulation is like a kid on a see-saw complaining that the person on the other end is manipulating the balance.

Herkie
Herkie

PMs maybe, but not gold, silver, perhaps. They confiscated gold at $20 per ounce and then immediately repriced it at $35 while outlawing private ownership. What makes you think that will not happen again? Besides, the ratio of silver mined to gold is just about 9:1. The current price ratio is 89.5:1. Also in a post collapse environment where fiat is no good and PMs are the only way to survive NOBODY will have change for a one ounce gold coin, unless you are buying acreage anyway.

But, Gresham's law, bad money drives out good. The smart survivor of the future dystopian world imagined here will have some of both "bad" money and "good." Remember, the colonies were in a depression because England starved them of cash, so they came up with the idea of printing their own scrip which lubricated the wheels of commerce. The 13 colonies were starting to look more prosperous than England so King George cracked down on it, had it destroyed, because he could not tax this under the table scrip, he made it a capital offense to issue or use it. Had he not done that we might never have declared independence.