There is a big issue in the balance of world economies, some countries have massive surplus and stronger exporting capacity (eg: China), while others are deficit ridden and finding growth difficult to generate (USA/EU). This is further compounded by the fact that much of the Government debt is now owned by the nations that we import from, essentially they are paid in dollar for their products, but they then send this money back and buy Government debt (t-bills & t-notes). In the example of China they have also refused to allow their currency to trade in a fully open market, preferring to peg to the dollar.
However, this doesn’t solve anything for the USA which can’t operate a strong dollar while trying to stimulate the economy and meet the many unfunded liabilities that must be paid (Federal and State pensions as well as Social Security), and in the EU Germany cannot easily export if the Euro is strong versus other currencies, and this means that a competitive devaluation is the only solution, in time the Dollar, Euro and Sterling will decline in value versus other currencies to the point that foreign debts are far reduced. The evidence of this being under way already is in the price of Gold when priced in both $ and €, as well as the fact that the Chinese have suddenly decided to allow the Yuan some open market movement (appreciation), the WSJ article actually points it out without stating this fact.
There are buyers in the market willing to sell dollar at a loss, gold is going up in price (because it is priced in devaluing dollars), Euro price of gold is increasing (Euro is also devaluing at the same time) and the Chinese are giving a concession they normally would have avoided (loosening of currency rules) because the alternative is to invoke a further devaluation of the assets they hold in the form of sovereign debt, meaning they undercut their savings reserves because it will now buy less on the world markets.
The US will need to find a way to deal with the serious imbalance eventually, as will Europe, but doing so means that somebody somewhere has to get hurt, and my money is on the pain being exported to Asia, they have the surpluses necessary to ensure that it doesn’t cause economic collapse, they are far away (let’s face it, nobody likes austerity) and the manufacturing to export flow to the USA is not going to stop any time soon, and that means that to a degree everybody wins. In Euroland the Germans need to export as well, and there will be anger at a weaker euro but the truth is that the youth unemployment will cause more disaster to the country than disaffected older savers.
The secular trend under way is for a far weaker dollar and euro, it is the only way to re-establish equilibrium in the markets. When something has to happen it becomes far easier to see than if it might happen, the international trade imbalance cannot co-exist with stability simultaneously, so sit back and watch this trend, it’s your friend.
by Karl Deeter of Irish Mortgage Brokers, Dublin 2, Ireland
