n September 2008 the US came to a fork in the road. The Public Policy decision to not seize the banks, to not place them in bankruptcy court with the government acting as the Debtor-in-Possession (DIP), to not split them up by selling off the assets to successful and solvent entities, set the world on the path to global currency wars.By lowering interest rates and effectively guaranteeing a weak dollar through undisciplined fiscal policy, the US ignited an almost riskless global US$ Carry Trade and triggered an uncontrolled Currency War with the mercantilist, export driven Asian economies. We are now debasing the US dollar with reckless spending and money printing with the policies of Quantitative Easing (QE) and the expectations of QE II. Both are nothing more than effectively defaulting on our obligations to sound money policy and a “strong US$”. Meanwhile with a straight face we deny that this is our intention. It’s called debase, default and deny. Though prior to the 2008 financial crisis our largest banks had become casino like speculators with public money lacking in fiduciary responsibility, our elected officials bailed them out. Our leadership placed America and the world unknowingly (knowingly?) on a preordained destructive path because it was politically expedient and the easiest way out of a difficult predicament. By kicking the can down the road our political leadership, like the banks, avoided their fiduciary responsibility. Similar to a parent wanting to be liked and a friend to their children they avoided the difficult discipline that is required at certain critical moments in life. The discipline to make America swallow a needed pill. The discipline to ask Americans to accept a period of intense adjustment. A period that by now would be starting to show signs of success versus the abyss we now find ourselves staring into. A future that is now significantly worse and with potentially fatal pain still to come.Unemployed Americans, the casualties of the financial crisis wrought by the banks, witness the same banks declaring record earnings while these banks refuse to lend. When the banks once more are caught with their fingers in the cookie jar with falsified robo-signing mortgage title fraud, they again look for the compliant parent to look the other way. Meanwhile the US debt levels and spending associated with protecting these failed (and still insolvent institutions) are so out of touch with US de-industrialized productive capability that the US dollar is falling and forcing countries around the world to devalue their currencies in a desperate attempt to maintain competitive advantage. So much for the “strong dollar” mantra we heard endlessly for years from every US Secretary of the Treasury that needed foreign investment to fund our deficits. Like second rate powers, our word is no longer our bond.The fork in the road which we chose has resulted in: 1) massive public debt levels that can never realistically be expected to be paid back, 2) Financial markets that are disconnected from fundamental historical values, 3) A global banking industry that can best be described as fragile and is realistically insolvent if the accounting games were to be removed.I think most would agree that massive public, private and consumer debt levels are a central problem to the current global predicament. We also however need to appreciate that these massive debt build ups have also allowed the over-building of production capacity. We have global supply that is now outstripping demand. The output gap in the US alone would require a theoretical -7% Fed Funds Rate according to the Taylor Rule (6) EXCESS CAPACITY The currency wars are being fought because global players are being forced to fight for a piece of the global demand pie that is growing at a slower rate (a first derivative problem) versus the capacity presently available and coming online. The Asian buildup of production capacity is nothing short of startling but it is premised on a free spending and 70% consuming US economy. A slowdown in the US and a weakening US dollar are major threats to political and social stability in the Asian export economies. Everything in the mercantile, export led Asian economies must be done to avoid this. The facts however are that there are no longer sufficient jobs in America to support past and present levels of consumptions. The middle class in America is quickly becoming extinct and with it the ability to famously ‘shop till they drop’. What are the US politicos to do? The well recognized Michael Hudson asserts in Why the U.S. Has Launched a New Financial World World War: “Finance is the new form of warfare – without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy’s banking system can create the most credit, using an army of computer keyboards to appropriate the world’s resources. The key is to persuade foreign central banks to accept this electronic credit. U.S. officials demonize foreign countries as aggressive “currency manipulators” keeping their currencies weak. But they simply are trying to protect their currencies from being pushed up against the dollar by arbitrageurs and speculators flooding their financial markets with dollars. Foreign central banks find them obliged to choose between passively letting dollar inflows push up their exchange rates – thereby pricing their exports out of global markets – or recycling these dollar inflows into U.S. Treasury bills yielding only 1% and whose exchange value is declining. (Longer-term bonds risk a domestic dollar-price decline if U.S interest rates should rise.) What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1 per cent interest cost? This is the game that is being played today.”The chart to the right was published in early spring of this year specifically spelling out that a ‘Beggar-thy-Neighbor’ roadmap lay ahead. WINNERS & LOSERS IN A CURRENCY WAR How could I have been so sure when I put this chart together? The realistic fact about wars are that there are winners and losers. These however are not the people on the battlefield. Since Caesar, wars are about money. The winners are those who finance them and the losers are those that pay for them. Rich banking families are well documented to have financed both sides. It matters not much who wins but rather that a war is fought so money is made. So who actually wins in a currency war? The answer is found by forensically following the money. EVERY WAR COMES WITH NEW TECHNOLOGY The most effective way of following the money is to consider the major new innovations in the financial world. Like all wars the winner is the one who innovates the ‘combat technology’ the fastest. We need to remember that the financial innovations discovered during and after the financial crisis such as: Collateralized Debt Obligations (CDOs), Credit Default Swaps (CDSs), Structured Investment Vehicles (SIVs), Special Purpose Entities (SPE’s) and a raft of securitization products were the foundations upon which were built the “Toxic Assets” and the reason for the global financial crisis. The toxic assets were the catalyst which we continuously heard referred to during the crisis which forced the government into massive public debt government spending in an apparent attempt to avoid a financial collapse. ...
