The G-20 and Policy Coordination

Readers may recall that the last G20 pow-wow (see “The Gasbag Gabfest” for details) featured an uncharacteristic lack of grandiose announcements, a fact we welcomed with great relief. The previously announced “900 plans” which were supposedly going to create “economic growth” by government decree seemed to have disappeared into the memory hole. These busybodies deciding to do nothing, is obviously the best thing that can possibly happen.

 

1-USDCNY(Weekly)Yuan, weekly – since the sharp move in USDCNY in August, market participants have begun to worry about the yuan and China’s shrinking foreign exchange reserves – click to enlarge.

 

There have been rumors though that they did at least strike some sort of sub rosa agreement with respect to the future course of yuan manipulation. In other words, some kind of policy coordination between China and other major currency issuers has quite possibly been agreed upon, even if only tacitly. Officially, China merely used the occasion to “reassure trading partners on foreign exchange”:

 

“Chinese policymakers on Thursday ruled out an imminent devaluation of the yuan as they seek to reassure trading partners ahead of the G20 summit that they can manage market stability while driving structural reforms.”

 

When global stock markets swooned in late August 2015 and again in January 2016, the decline in the yuan’s exchange rate was widely blamed as the cause.  Considering various central bank policy decisions announced since the G20 meeting, it does appear as though a coordinated move aimed at halting the yuan’s slide and support wobbly risk asset prices has been underway.

Even the Fed has become a lot more ambiguous about its previously announced rate hike plans. China’s authorities meanwhile have employed all sorts of tricks to hold the yuan up. According to Bloomberg, it has found “more discreet ways to support the yuan” – mainly by employing derivatives. Using forward transactions has two advantages from the perspective of China’s planners: they delay the official recognition of foreign exchange outflows and they don’t need to be reported to the IMF. The result is that they are “hiding the PBoC’s  footprints in the financial markets”, as Bloomberg puts it (see also Roger’s article on China’s new ways to lie with numbers).

 

3-Yuan ForwardsA surge in yuan forwards buying designed to surreptitiously support the exchange rate; however, the chickens are bound to eventually come home to roost – this is only a delaying tactic – click to enlarge.

 

Ahead of the G20 meeting it was vehemently denied that there would be an agreement over exchange rates. China’s finance minister let it be known that such an agreement was “wishful thinking” and “a media fantasy”. However, right after the meeting we could read that “G20 Nations, Including China, Swear Off Currency Devaluations”. So there was no agreement, instead they just held a currency-related oath-taking ceremony.

As Carmen Reinhart has recently pointed out, China’s attempt to both expand money and credit at home and keep the yuan at an artificially high exchange rate cannot possibly work. A chart of the ratio of China’s foreign exchange reserves to the broad money supply aggregate M2 illustrates a growing discrepancy – the  ratio has in the meantime fallen back to levels last seen in 2003:

 

2-China-reserves to M2 ratioThe ratio of China’s forex reserves to M2 – click to enlarge.

 

The attempt to artificially support the yuan in order to alleviate short term financial pain seems destined to eventually end up triggering a plethora of “unintended consequences”.

 

A History of Devastating Failures

History suggests that global monetary policy cooperation in order to artificially prop up or weaken specific currencies invariably leads to major disasters. The most famous example is perhaps the agreement struck between the Federal Reserve’s Benjamin Strong (notorious provider of “coups de whiskey” to the stock market) and BoE chief Montagu Morgan in the 1920s.

The plan was to support the British pound by means of the Fed adopting a looser monetary policy. Britain had gone back to gold parity at a completely unrealistic exchange rate and had implemented policies that were putting additional pressure on the currency. As a result gold started to flow out from Britain at an accelerating pace, so it had to either alter its policies or get outside help. The Fed decided to provide it.

This in turn helped to drive the credit and asset bubble of the roaring 1920s to excessive heights and eventually produced what was arguably the greatest economic and socio-political catastrophe of modern times. As Murray Rothbard writes on the agreement in “America’s Great Depression”:

 

“Instead of repealing unemployment insurance, contracting credit, and/or going back to gold at a more realistic parity, Great Britain inflated her money supply to offset the loss of gold and turned to the United States for help. For if the United States government were to inflate American money, Great Britain would no longer lose gold to the United States. In short, the American public was nominated to suffer the burdens of inflation and subsequent collapse in order to maintain the British government and the British trade union movement in the style to which they insisted on becoming accustomed.”

 

Along similar lines, in more recent times there have e.g. been the Plaza and Louvre accords – one of which was designed to weaken the dollar’s exchange rate, while the other was designed to strengthen it after the results of the first accord appeared to have gone too far. The result was not only a period of extreme currency volatility, but an asset bubble that eventually culminated in the 1987 stock market crash and the blow-off in Japan’s stock and real estate markets that peaked in 1989. Whatever short-term objectives were supposedly served by these accords were completely dwarfed by the long term effects.

 

4-USD, SPX, NIKKUSD Index (DXY), SPX and Nikkei from 1980 to 1990 – wild swings in the US dollar, accompanied by major asset bubbles – click to enlarge.

 

The 1987 crash in turn inspired the so-called “Greenspan put”, and the bubble of the 1990s followed in its wake. Along the way there was the peso crisis of the mid 1990s and the Asian/Russian currency crisis of 97/98, after the currency pegs of the “Asian tigers” gave way. These crises were of course met with even more interventions, which egged on credit and asset bubbles of truly stunning proportions (in this case, interest rate cuts by the Fed in late 1998 were the precursor to the giant blow-off in technology stocks).

These modern-day currency manipulation efforts can essentially be seen as a reaction to the fact that the unfettered fiat money system that has been in place since the early 1970s is producing ever greater imbalances and distortions. It is held that these negative results require additional intervention so as to be “corrected”.  One must keep in mind to this that currency manipulation always involves the adoption of specific monetary policies. These will as a rule push interest rates even further away from the natural rate and amplify boom-bust cycles accordingly.

 

The “Long Run” Has Caught Up With Us

It has turned out that contrary to the famous bon-mot by Keynes, we are actually not “all dead in the long run“. The long-run has apparently caught up with us. Since the bursting of the technology bubble in 2000 we have experienced the biggest expansion in money and credit in history, accompanied by boom-bust phenomena of increasing severity.

These include real estate bubbles of previously unimaginable size all over the world, the 2008 financial crisis, an unprecedented expansion in global debt levels (including government debt that in a number of cases has not only set new peacetime records, but even exceeded previous wartime peaks) and lately the mother of all echo bubbles in risk assets.

And yet, here we are, with economic growth at best anemic for the past seven years (and becoming more so), global trade growth going into reverse, and central banks engaging in utterly insane monetary experiments. Not surprisingly, social and economic upheaval is on the upswing around the world. Eventually there will be one intervention too many and the whole charade will blow up in an unstoppable cascade.

The only question is where and when the unraveling will begin. Japan strikes us as a candidate with good potential for providing the trigger, mainly because its monetary and fiscal policies have become such an overt and breathtakingly enormous Ponzi scheme. By now the BoJ owns about one third of Japan’s giant public debtberg. The old saying that “we owe it to ourselves” finally seems to have come true there (of course, as the saying goes it is simply “too good to be true”).

 

5-BoJ assetsAssets held by the BoJ – “we owe it to ourselves” – the Japanese government has become the biggest holder of its own debt by means of monetization – click to enlarge.

 

As Mish recently noted, the BoJ’s massive debt monetization efforts are already beginning to run into unexpected snags. Given that Japan is not only is home to the developed world’s largest domestic debt pile, but is at the same time still the world’s largest creditor, it is easy to see how a crisis of confidence could ripple out from there and engulf the rest of the world. Incidentally, the US played a similar role as an important creditor nation in the 1920s; the repatriation of US investments from Europe in the early 1930s was a major factor in exacerbating a global avalanche of debt defaults.

 

Conclusion

Looking at the way in which today’s ever more extreme monetary policy measures and interventions are reported and discussed, one could almost get the impression that the philosopher’s stone has finally been found and that wealth can indeed be conjured up ex nihilo at the push of a button. However, this is not the case – on the contrary, the more often these buttons are pushed, the weaker the structure that actually generates real wealth becomes.

We believe a lot of unpleasantness could be avoided if these crazy policies were finally stopped. For a while here would certainly be a period of intense economic pain, but human ingenuity combined with the world’s accumulated real capital should soon restore sound economic growth. In principle, we are actually quite optimistic on that score. After all, even today’s severely hampered market economy still manages to create enough wealth for the world to muddle on.

However, this would also require a profoundly change in thinking. Economic progress cannot be “ordered” from the top by a coterie of planners, regardless of how well-intentioned they may be. Their constant tampering with the market economy must end. It would be best to release these people into the marketplace, where they could put their abilities to good use by serving consumers instead of coercing them.

 

Charts by: investing.com, Project Syndicate, Bloomberg, StockCharts, St. Louis Federal Reserve Research

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

3 Responses to “The Pitfalls of Currency Manipulation – A History of Interventionist Failure”

  • All-Your-Gold-Are-Mine:

    Then again, the USA has a horde of No6 touchy-feely transgender Obamanations that absolutely hate their country blaming it for everything under the sun… therefore increasing social unrest and intra-country animosity between these airheads and people of reason could trigger a collapse before Japan or Europe…. just saying’…
    ™©®…
    /\___/\
    (=^.^=)
    (“) (“)_/

  • therooster:

    The yin of our debt based system had to emerge before the yang (assets) could be added with real-time pricing.
    Is this really so different from light coming out of darkness in the proper order of creation ? Not at all.

    Symbiosis becomes the result. A currency hybrid of circulating debt and assets in real-time.

    https://33.media.tumblr.com/99c1448caada384261a40db55c1c7957/tumblr_nc4x67d9vi1tjsogwo1_500.gif

  • No6:

    Europe could be the trigger.
    Insane debt levels also but increasing social unrest and inter country animosity could trigger collapse before Japan gets the blame.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 21st Century Shoe-Shine Boys
      Anecdotal Flags are Waved   "If a shoeshine boy can predict where this market is going to go, then it's no place for a man with a lot of money to lose." - Joseph Kennedy   It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if...
  • Christopher Columbus and the Falsification of History
      Crazed Decision The Los Angeles City Council’s recent, crazed decision* to replace Christopher Columbus Day with one celebrating “indigenous peoples” can be traced to the falsification of history and denigration of European man which began in earnest in the 1960s throughout the educational establishment (from grade school through the universities), book publishing, and the print and electronic media.   Christopher Columbus at the Court of the Catholic Monarchs (a...
  • India: The Genie of Lawlessness is out of the Bottle
      Recapitulation (Part XVI, the Last) Since the announcement of demonetization of Indian currency on 8th November 2016, I have written a large number of articles. The issue is not so much that the Indian Prime Minister, Narendra Modi, is a tyrant and extremely simplistic in his thinking (which he is), or that demonetization and the new sales tax system were horribly ill-conceived (which they were). Time erases all tyrants from the map, and eventually from people’s...
  • The Forking Paradise - Precious Metals Supply and Demand Report
      Forking Incentives A month ago, we wrote about the bitcoin fork. We described the fork:   Picture a bank, the old-fashioned kind. Call it Acme (sorry, we watched too much Coyote and Road Runner growing up). A group of disgruntled employees leave. They take a copy of the book of accounts. They set up a new bank across the street, Wile E Bank. To win customers, they say if you had an account at Acme Bank, you now have an account at Wile, with the same balance!   BCH, son...
  • The Government Debt Paradox: Pick Your Poison
      Lasting Debt “Rule one: Never allow a crisis to go to waste,” said President Obama’s Chief of Staff Rahm Emanuel in November of 2008.  “They are opportunities to do big things.”   Rahm Emanuel looks happy. He should be – he is the mayor of Chicago, which is best described as crisis incarnate. Or maybe the proper term is perma-crisis? Anyway, it undoubtedly looks like a giant opportunity from his perspective, a gift that keeps on giving, so to speak. [PT] Photo...
  • The United States of Hubris
      Improving the World, One Death at a Time If anyone should have any questions about whether the United States of America is not the most aggressive, warlike, and terrorist nation on the face of the earth, its latest proposed action against the supposed rogue state of North Korea should allay any such doubts.   Throughout history, the problem with empires has always been the same: no matter how stable and invincible they appeared, eventually they ran into “imperial...
  • Long Term Statistics on AAPL
      Introductory Remarks by PT Below we present a recent article by the Mole discussing a number of technical statistics on the behavior of AAPL over time. Since the company has the largest market cap in the US stock market (~ USD 850 billion – a valuation that exceeds that of entire industries), it is the biggest component of capitalization-weighted big cap indexes and the ETFs based on them. It is also a component of the price-weighted DJIA. It is fair to say that the performance of...
  • Tragedy of the Speculations
      The Instability Problem Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as their replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future. In fact, it is not.   A tragedy... get the hankies out! :) [PT]   Why not? To answer, let us start with a look at the incentives offered by bitcoin. We saw a comment this week, which is apropos:   "Crypto is so...
  • Despite 24/7 Trading: Bitcoin Investors are Taking off for the Weekend on Friday Already
      Crypto-Statistics In the last issue of Seasonal Insights I have discussed how the S&P 500 Index performs on individual days of the week. In this issue I will show an analysis of the average cumulative annual returns of bitcoin on individual days of the week.   Bitcoin, daily. While this is beside the point, we note the crypto-currency (and other “alt coins” as well) has minor performance issues lately. The white line indicates important lateral support, but this looks to...
  • To Hell In A Bucket
      No-one Cares... “No one really cares about the U.S. federal debt,” remarked a colleague and Economic Prism reader earlier in the week.  “You keep writing about it as if anyone gives a lick.” We could tell he was just warming up.  So, we settled back into our chair and made ourselves comfortable.   The federal debtberg, which no-one cares about (yet). We have added the most recent bar manually, as the charts published by the Fed will only be updated at the end of the...
  • Precious Metals Supply and Demand
      Fundamental Developments There were big moves in the metals markets this week. The price of gold was up an additional $21 and that of silver $0.30. Will the dollar fall further?As always, we are interested in the fundamentals of supply and demand as measured by the basis. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.   Gold and silver prices in USD terms (as of last week Friday) - click to enlarge.   Next, this is a...
  • Precious Metals Supply and Demand
      Back to the Happy Place Amid a Falling Dollar The prices of the metals dropped this week, $24 and $0.38. This could be because the asset markets have returned to their happy, happy place where every day the stock market ticks up relentlessly.   Sometimes, happiness is fleeting... - click to enlarge.   The major currencies have been rising all year—we insist that this is a rise in these dollar derivatives, not a fall in the dollar—and this is a risk-on pattern....

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com