Currency War!

By Courtney Smith

Dateline: Bangalore, India

Super Mario Draghi, European Central Bank head, has decided enough is enough.

He sees other countries like the US, UK, and Japan doing quantitative easing. He sees China doing it too. He doesn’t want to be left out so now he too is doing quantitative easing.

Why?

Orthodox economists say that lowering the value of a currency can jumpstart an economy but making the country’s products cheaper for export. True.

Europe’s economy is drifting along at about zero but with unemployment at astronomical levels. Spain alone has 25% unemployment.

So shouldn’t the ECB ease monetary policy and drop the Euro even further?

No.

It is true that exports will be cheaper and exporting countries will be able to sell more goods.

But importing companies will sell less goods!

More importantly the wealth of Europeans is being diminished. The value of the euro is now down almost 20% in the last six months which means that the wealth of europeans has been crushed by 20%. In just six months! Appalling!

So we can see that damaging your currency doesn’t lead to higher growth. It simply takes growth away from importers and the general population and gives it to exporters.

So, what is the real motivation of Draghi and the rest? As the Romans said, cui bono, who profits?

The governments of Europe are the big beneficiaries.

The savaging of the currency reduces the debt burden of the European countries by 20%! Europe is suffering mightily under the yoke of trillions of dollars of debt. Hammering interest rates to zero and debasing your currency are proven ways to reduce the burden of debt.

Further, Draghi says he wants inflation to go to 2% from the roughly 0% currently. Once again, cui bono?

The governments are the biggest winners if inflation moves to 2% because, once again, inflation is a tax on savers. It shift wealth from those who save to those who spend. And European governments are spending like a sailor on shore leave.

Major central banks are engaged in a currency race to zero. Virtually all the major central banks are running monetary policies reminiscent of Zimbabwe or a banana republic. All of them are trying to debase their currency.

They are all trying to push their currency to zero. It is the world’s biggest horse race.

The problem is that the “winner” is the loser. The country that pushes down their currency the most will be the once with the worst economic growth, the lowest standard of living, and the greatest potential for blood in the streets from riots.

The solution? Create a stable currency with no inflation or deflation. Cut taxes. Cut regulations.

This will cause the country to boom thus actually driving up tax receipts. More importantly, it will drive up the standard of living of citizens.

Governments have always debased their currency. Coin clipping is a venerable scam perpetuated by monarchs for thousands of years.

Quantitative easing is just another name for it. And the results will be same as before. There will come a time when there will be a crisis of confidence and a currency will disappear like the marks in Weimar Germany or the dollars of Zimbabwe.

We have not yet reached that level in the major developed countries that it is the inevitable result of currency debasement. We will see savers lose their savings and speculators get rich. But the average citizen will be savaged.

This entry was posted in Economics, Forex. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *