Competitive Currency Debasement 101 Class is in Session

Mish

Janet Yellen is Joe Biden's Treasury Secretary nominee. She claims to support "market forces" as the driver for the US dollar. What does that really mean in a practical sense?

Swiss Cheese Statements on the US Dollar

Biden's Treasury Secretary, Janet Yellen, is also a prior Fed Chair. I noted her Swiss Cheese Statements on the US Dollar.

The United States doesn’t seek a weaker currency to gain competitive advantage. We should oppose attempts by other countries to do so.

Yellen can make whatever swiss cheese statements she wants but how would a central bank act if it wanted to sink the dollar?

Steps to Weaken a Currency

  1. Cut interest rates
  2. Engage in massive QE balance sheet expansion
  3. Pledge to keep rates low indefinitely
  4. Pledge to ignore inflation and let it run hot to make up for alleged undershooting
  5. Encouraging more fiscal stimulus

The Jerome Powell Fed is five for five on doing the very things that would cause the dollar to sink and Yellen supports all of them.

Other counties are doing many of the same things and if they weren't the dollar would be dropping faster. 

Yellen is Yellin' For More Free Stuff

Please note Yellen is Yellin' For More Free Stuff

Ms. Yellen acknowledged the government’s mounting debt load, which stands at $21.6 trillion—or roughly 100% of a year’s economic output. But she urged lawmakers to put those concerns aside for now. Interest rates are at historic lows and expected to remain there for some time, making borrowing more affordable, she said.

Actually the National Debt is about $28 trillion, not $21.6 as claimed by Yellen.

They Are All Manipulators

The US, EU, Bank of Japan, China, and Swiss National Bank (SNB) are all major currency manipulators.  They just use different tactics.

Q: Any Collusion? 

A: There Can't Be

The Swiss want the Franc lower than the Euro, the US wants a low dollar, the BoJ a low Yen, etc.

It's global competitive currency debasement . That's what keeps the dollar from a freefall as Yellen yaps about "market forces".  

Competitive Currency Debasement 101

Manipulation Tactics Vary

  1. The yuan doesn't float so China can use a peg. 
  2. The Bank of Japan (BoJ), EU, and Swiss National Bank (SNB) use negative rates and QE. 
  3. The SNB also defends the Franc from appreciation vs the Euro via a currency ceiling backed by unlimited buying. 
  4. The BoJ also has in the past used currency ceilings and direct currency buying to maintain targets.
  5. The Fed uses QE and low but not negative rates coupled with its support for very loose fiscal policy.  In contrast, the ECB has rules preventing extremely loose fiscal policy. 

Direct vs Indirect Currency Manipulation

Tactics 1, 3, and 4 are direct currency manipulation. Tactics 2 and 5 are indirect currency manipulation. 

The competing direct and indirect forces are what makes it very hard for countries to achieve consistent debasement headway!

I use the term "debasement headway" more than a bit sarcastically. 

What About Hyperinflation?

The net result of the forces and counter-forces plus ongoing speculation determines currency trends. 

To pick a country for high inflation, my bet is Japan first. 

That's based on demographics that will at some point change coupled with lingering impacts of Abenomics and negative interest rates of the BoJ.

Betting on US dollar hyperinflation in this setup is more than a bit foolish.

A Reader Asks: Why is the Euro So Strong?

For more discussion on the Euro vs the Dollar, please see A Reader Asks: Why is the Euro So Strong?

That link discusses an important fundamental flaw in the Euro known as Target2. 

If the Eurozone breaks apart, then countries in the EU may see hyperinflation or severe inflation first. 

Once again, betting on US dollar hyperinflation in this setup is more than a bit foolish.

Is the Fed Worried? 

For comments by Danielle DiMartino Booth, a skilled Fed watcher, please see New All-Time Low Junk Bond Yield, Is the Fed Worried?

And What About Money Supply?

Finally, please consider Q&A With Lacy Hunt on Money Supply.

Mish

Comments (41)
No. 1-13
Cichocki
Cichocki

Which currency do you think will will win the debasement battle? Does it matter as far as the price of gold is concerned? (separately - doesn't it seem like Platinum is relatively ignored right now?)

PecuniaNonOlet
PecuniaNonOlet

I think why Yellen is terrified of bitcoin is that the fed and central banks lose monetary control all over the world. Imagine if everyone woke up tomorrow and simply started trading goods and services in bitcoin. How exactly to g-men going to seize the currency when it is digital and there is no central bank?

It wont actually be bitcoin but the next gen digital currency where the central banks will lose control. No need to debit/credit cards or bank accounts at that point, it is all in decentralized servers.

The smart consumer will put some of their digital currency in different places like a mobile phone, tablet, computer and smart watch on multiple cloud services and multiple accounts so as to never have all your eggs in one basket.

KidHorn
KidHorn

There's a huge difference between the US and China and Japan. China and Japan have historically fought to depress their currency vs USD by direct Forex intervention. The US doesn't do that.

The USD isn't manipulated by our gov't. It's manipulated by everyone else.

China and Japan can easily prevent hyperinflation by simply not intervening in Forex. The USD is at the mercy of countries that we have a trade deficit with. China and Japan have the ability to crash USD. We don't have the ability to crash their currencies.

frozeninthenorth
frozeninthenorth

America's three largest trading partners are China, Mexico and Canada -- in all cases the currency movements have been minimal (and the shift in the MXN has been based on the differential in "inflation rates"). Trade with Europe, Japan is much smaller -- As for the Swiss they have a very different problem, 20 years ago you got 4 swiss francs to the US dollar, now slightly less than 1. That doesn't look like competitive devaluation.

As for the action of the central banks, they are driven by internal concerns and very little by their respective currency weakness. In fairness only a quarter of US GDP is trade-driven, in Europe is only 15% -- competitive devaluation only goes so far...

BornInZion
BornInZion

"Actually the National Debt is about $28 trillion, not $21.6 as claimed by Yellen."

A trillion here and a trillion there and soon your talking real money!

PecuniaNonOlet
PecuniaNonOlet

In other news, more Brexit regret. Watching this video parallels a whole lot to yhe previous presidents empty promises. The parallels are amazing.

njbr
njbr

Brexi woes--I would highly recommend reading this twitter thread from Peter Foster at the Financial Times in which the UK negotiated mightily to kneecap UK trade....

Augustthegreat
Augustthegreat

Any country with a central bank that does any operation /intervention is by definition Manipulating the currency. It's pure hypocrisy for the US to accuse other countries for currency manipulation.

Knight
Knight

What do you have in your wallet? King Dollar

mrutkaus
mrutkaus

Ben Franklin, in Chapter 21 of Van Doren's biography, has sentiments similar to Mish's about paper money:

"The effect of paper currency is not understood on this side of the water (France). And indeed the whole is a mystery even to the politicians. How we have been able to continue a war four years without money and how we could pay with paper that had no previously fixed fund appropriated specifically to redeem it. This currency, as we manage it, is a wonderful machine. It performs its office when we issue it; it pays and clothes troops and provides victuals and ammunition; and when we are obliged to use a quantity excessive, it pays itself off by depreciation. "

And Van Doren says "These miracle happened only in America. In Europe, actual money was needed."

Advancingtime
Advancingtime

Due to the fact, none of the four major currencies are anything to brag about, predictions of the dollar's demise are likely premature and overblown. When you consider just how destabilizing currency swings can be it is easy to see how a strong dollar could obliterate the global economy.
It should not be a surprise in our current situation that behind the curtain central bankers could be busy manipulating currencies so they trade in a narrow range that will not rock the boat. More on this subject in the article below.

Patvillars3151
Patvillars3151

The value of all currencies must be reduced to zero so that consumers can spend and accelerate the growth of their economies. Only people who have accumulated, uncirculated money are interested in valued currencies.


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