This week, Syntrinsic has invited guest columnist, E. Pluribus Unum, to comment on the global credit crisis. When it comes to currency, few possess Unum’s heads-up insight or universal appeal.
US Dollars Underwhelm Opposing Forces
(Berlin, Tokyo, Washington DC)—E.P. Unum
While most Americans have been caught up in the drama of the mid-term elections, a real battle has been waging that touches every American household. Reports from the frontlines indicate that the United States is clashing with former WWII adversaries Japan and Germany, cold war antagonist Russia, and emerging economies from Asia to Latin America. Casualties are mounting and the main victim thus far is America’s standing in the world.
This is not simply a battle over territory or natural resources, nor one of faith or ideology or pride. On the other hand, it is a battle for all of these elements, for the conflict is one of economic strength not political power; the primary armaments are currencies, not bullets; and the battlefield is not some forest or hilltop but the sacred ground of the global capital markets.
Like so many geopolitical conflicts, there has been a long escalation of the underlying tension, so much so that there is no one event, person, or date that marks the Beginning of the crisis. Globalization has opened markets and election polls, technology has democratized most information in most of the world, and consumer appetites have steadily grown, changing the definition of middle class and its cost. Throughout this intensification, the developed world has relentlessly grown its leverage.
If the other factors have been kindling, then leverage has been the gasoline poured atop the wood pile. All that was missing was a match. The US housing market became that primary catalyst, with help from housing markets in Western Europe, financial engineers in New York and London, and other minor players. And the currency race to the bottom was on.
Sure, on the surface, American diplomats have been discussing stimulating jobs, reassuring consumers, and keeping people in their homes. But in times such as these, it is critical to look past the posturing. While the diplomats have been holding press conferences, America’s top financial generals have been on a heavy recruitment drive, boosting enlistment from all quarters so that they can flood the domestic and foreign markets with green troops and thus overwhelm our economic competitors. They have scrounged in all corners for recruits, lowered standards, and even gone so far as to assign the same soldiers to multiple missions at the same time. Despite early claims that they would not do so, they have reassigned dollars that had been propping up mortgage backed bonds to now prop up Treasury Bonds instead of sending them home as promised.
Just this past week, the Federal Reserve (not the Pentagon, but a Federal agency similarly tight lipped about its long-term strategy) committed to throwing another 600 billion soldiers into the fight against—well, you know. Each month, waves of 75 billion troops are expected to march out of their headquarters in Washington DC and off to the brutal capital markets where they will confront Yen and Euros and any other currency that dares to be weak.
Out on the battlefield, their mission is simple: drive down the cost of American exports. Make it cheaper to do business with America and concurrently, more expensive to do business with everyone else. This conflict is not based on skill or intrigue; rather, it is a simple confrontation that will be won by numbers and sheer chutzpah. Who’s willing to do what the others will not or cannot do?
“I don’t care how hard they try to keep their currencies stable, when the battle is over, we will be the weakest currency out there,” claimed an anonymous Treasury Sergeant, “or we aren’t American dollars.”
“That’s right,” said an unnamed member of the banking special forces. “Look, our way of life is at stake. You gotta do what you gotta do. If the Japanese try to keep the Yen from strengthening, then we’ll just out-print them. They’ve kept their interest rates near 0% for 20+ years. It’s our turn. We’ve saved the banks. Paying nothing on their deposits will help banks become profitable again. Who can argue with that?”
Another commentator noted that, “If the EU thinks that we’ll just roll over and let our currency appreciate, then they don’t know modern America. Sure we’ve got special relationships, but we’ve got a lifestyle to maintain here.”
In past confrontations such as World War II, the US relied upon a vibrant, growing population, superior natural resources, and robust manufacturing and capital markets to outmatch its opponents. Today, it is America’s superior printing presses and the unabashed confidence to use them that has put our global competitors on the run.
Look at the casualties so far: Versus the US dollar, the Yen has appreciated by 13% since May, while the Euro has increased by 17% since June. Even the Polish Zloty has gained 19% during the same period. In short, it’s a rout. No one is really even close. It’s an American triumph. Start the ticker tape (parade).
American success is sparking angry reactions around the globe. Brazil’s President-elect, Dilma Rousseff accused America of recreating the competitive currency devaluation environment that led up to WWII. And according to the Wall Street Journal, German Finance Minister Wolfgang Schlauble claimed that the Federal Reserve is “undermining the credibility of U.S. financial policy. It just doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar.” But one would expect America’s competitors to complain; they are losing the devaluation battle and they know it.
The battle is still in its early stages, but America’s financial generals have made clear their commitment to keeping the US dollar weak and they aren’t going to change course just because it upsets our European allies and global trading partners.
Of course, not everyone is upset. In a moment of candor, one unnamed strategist from a certain middle kingdom commented, “Oh, we complain on the surface, but it is just an act. Imagine if your greatest adversary kept weakening himself on purpose, every day, giving away more control, more power, more influence. Really, you could not dream up such a situation. When the dollar has become too weak, people around the world will look for another currency. And we’ll be waiting. It may be our children, or even our grandchildren, but we’ll be waiting. They may win today’s battle, but we will win the war.”