Wednesday, November 17, 2010
Sunday, October 31, 2010
Currency wars - Killing people with numbers
We are now hearing more and more in the media about the upcoming currency wars. It is generally depicted as being somewhere between bad behaviour and protectionism. In reality, it will have deadly results on the people who are already living from hand to mouth.
I would first like to clarify what inflation really is. Most think inflation is rising prices. Everything costs more next year, and when asked why that is, most answer "inflation" and leave it at that. The fact is that rising prices is not the cause of inflation. Inflation is the cause of rising prices. This is a very important distinction. Basically, we can think of the economy as a total of money chasing a total of goods and services. The traditional monetarist view is that banks create money (via credit and debt), and lend it out to people who then expand economic activity. Thus a sort of equilibrium is established between the sum of money in the system versus the sum of goods and services. In practice, economies are biased towards slight inflation (in Norway the goal is 2.5% per year) because it is better to have a little inflation than deflation. Money therefor has no absolute value, it is always relative to the goods and services available. Inflation is therefor an increase in the moneysupply versus the amount of available goods and services. It manifests itself as rising prices, more money chasing the same amount of goods and services. Deflation is the opposite, the decrease of moneysupply in relation to goods and services.
We can now begin to understand what currency wars are. They are attempts at lowering or increasing the value of currencies relative to other currencies. It is only possible in a fiat economy, where money can be "printed" into existence. Basically, any country can inflate their moneysupply by the press of a few buttons. The US Federal Reserve is currently discussing the size of the so called QE2 (Quantitative Easing part 2, a euphemism for printing money). The hope is that by flooding the economy with cheap credit and low interest rates, savers will be punished for sitting on their cash (with negative real interest rates) and will therefor start taking risks and making the economy grow. No country has ever inflated its way to prosperity, but that still doesn't stop them from trying. Usually, countries have more or less balanced currencies. There is sort of a "gentlemans" agreement that no civilized country will print more money relative to all the others, and thus keep the balance about the same, even though nominal prices increase yearly in the individual countries. What we are hearing now, is that some countries are "misbehaving", and printing more money than they should. This is of course true. China is manipulating its currency quite openly, but so is the US. The political posturing is quite absurd, as they all know that they are doing it but they won't admit to it in public. The US really wants to look like the good guy, while in reality they are the biggest bully in the yard. When countries inflate their moneysupply without economic growth to back the increase, they are trying to change the balance of purchasing power and/or manipulate interest rates. A lower relative currency value is good for countries in debt, as the debt can be paid back in currency that is worth less. A high currency value is good for countries who import most of what they need. They obviously want to get the most for their money. Likewise, countries which rely heavily on exports want to keep their currency value low, so that other countries will buy more from them.
So, what will most likely happen when the US prints money? This is especially interesting, since the USD is the worlds reserve currency. Almost everything is priced in dollars in international trade. Well, what has happened in the past? What happens when the economy is stalling, people aren't lending or spending and loads of fresh money enters the system via the banks? What we see is that it goes mostly into speculation. Since there is very low or no real growth to speak of, but pension and money funds and hedge funds and all the other funds still need a good return on their money, liquidity flows into the stock markets and commodity markets. Now that the housing market is declining in most western countries, the only moneymakers left there are foreclosures and fees to be sucked out of people.
So, the play of the day becomes driving prices up and sell before the bubble pops. Since there is no increase in economic activity to justify higher prices, everyone knows that it's a game, but everyone wants in. The hope is that there is always a "greater fool" who will be standing when the music stops and the chairs are all taken. Of course, this is well known among politicians and economists. In fact, they are counting on it. When there is no economic growth, it has to be manufactured by stealing money from all of us to prop up the markets. How is it stealing? It is easier here to think of money as purchasing power, not of a real number or value. If more money in the system is driving up prices, but you are earning the same amount of money as you were last year, then you have less purchasing power. Where did it go? It went to the people who got a larger share of the moneysupply when it was inflated, ie. the banks and the different funds. Inflating the moneysupply to grow the economy will in the end destroy the system. The imbalances will grow so large, that it will change one way or the other. How that change will manifest has yet to be seen, but historically we've seen wars and revolutions.
We are therefor likely to see a lot more suffering and death in the coming years. When price increases in food staples like rice and corn, which is the basic meal of billions of people every day all over the globe, become so high that fewer and fewer are getting the calories they need to live, we may see hunger and disease and unrest on scales we can't even imagine. Once one country starts printing, the others have to follow or suffer the consequences. It's really a race to the bottom, and is in the end about power and who will come out on top of a now much smaller pile after the dust clears. We already know who will lose, it's the people who's income aren't "inflation adjusted".
We here in the northern part of Europe are lucky. A loss in purchasing power for us isn't so drastic. Even rising prices in the commodity markets due to all the free money being pumped into the system won't do more than restrict our vacation choices or maybe hold off on buying that new car until next year. At least for the short term. However, for the vast majority of the people on this planet who live on a few dollars a day, this will mean less food and basic necessities. Monetary protectionism (either via direct intervention like import taxes, market restrictions or subsidies) or indirectly via monetary policies and institutions (like the World Bank or IMF) have always been worst for the poor. Poor people starve every day because of the way nations keep other nations down with "free trade" policies. They aren't about freedom at all. They know that free markets would redistribute parts of our livingstandard to the poor nations. Our high prices and wages wouldn't be artificially propped up anymore, and more and more people would enter our markets with their products or services at prices which would undercut ours (This is called "social dumping" here in Norway). Free markets are therefor true socialism, the great equalizer between all nations and all people. An important part of a free market is money. While money is controlled by politicians and the global banking cartel and can be printed into existence, there can be no real freedom. The first step to help the poor should therefor be to change the way money works and open our markets to them. Right now, we are doing the exact opposite, and i don't expect it to change soon.
I would first like to clarify what inflation really is. Most think inflation is rising prices. Everything costs more next year, and when asked why that is, most answer "inflation" and leave it at that. The fact is that rising prices is not the cause of inflation. Inflation is the cause of rising prices. This is a very important distinction. Basically, we can think of the economy as a total of money chasing a total of goods and services. The traditional monetarist view is that banks create money (via credit and debt), and lend it out to people who then expand economic activity. Thus a sort of equilibrium is established between the sum of money in the system versus the sum of goods and services. In practice, economies are biased towards slight inflation (in Norway the goal is 2.5% per year) because it is better to have a little inflation than deflation. Money therefor has no absolute value, it is always relative to the goods and services available. Inflation is therefor an increase in the moneysupply versus the amount of available goods and services. It manifests itself as rising prices, more money chasing the same amount of goods and services. Deflation is the opposite, the decrease of moneysupply in relation to goods and services.
We can now begin to understand what currency wars are. They are attempts at lowering or increasing the value of currencies relative to other currencies. It is only possible in a fiat economy, where money can be "printed" into existence. Basically, any country can inflate their moneysupply by the press of a few buttons. The US Federal Reserve is currently discussing the size of the so called QE2 (Quantitative Easing part 2, a euphemism for printing money). The hope is that by flooding the economy with cheap credit and low interest rates, savers will be punished for sitting on their cash (with negative real interest rates) and will therefor start taking risks and making the economy grow. No country has ever inflated its way to prosperity, but that still doesn't stop them from trying. Usually, countries have more or less balanced currencies. There is sort of a "gentlemans" agreement that no civilized country will print more money relative to all the others, and thus keep the balance about the same, even though nominal prices increase yearly in the individual countries. What we are hearing now, is that some countries are "misbehaving", and printing more money than they should. This is of course true. China is manipulating its currency quite openly, but so is the US. The political posturing is quite absurd, as they all know that they are doing it but they won't admit to it in public. The US really wants to look like the good guy, while in reality they are the biggest bully in the yard. When countries inflate their moneysupply without economic growth to back the increase, they are trying to change the balance of purchasing power and/or manipulate interest rates. A lower relative currency value is good for countries in debt, as the debt can be paid back in currency that is worth less. A high currency value is good for countries who import most of what they need. They obviously want to get the most for their money. Likewise, countries which rely heavily on exports want to keep their currency value low, so that other countries will buy more from them.
So, what will most likely happen when the US prints money? This is especially interesting, since the USD is the worlds reserve currency. Almost everything is priced in dollars in international trade. Well, what has happened in the past? What happens when the economy is stalling, people aren't lending or spending and loads of fresh money enters the system via the banks? What we see is that it goes mostly into speculation. Since there is very low or no real growth to speak of, but pension and money funds and hedge funds and all the other funds still need a good return on their money, liquidity flows into the stock markets and commodity markets. Now that the housing market is declining in most western countries, the only moneymakers left there are foreclosures and fees to be sucked out of people.
So, the play of the day becomes driving prices up and sell before the bubble pops. Since there is no increase in economic activity to justify higher prices, everyone knows that it's a game, but everyone wants in. The hope is that there is always a "greater fool" who will be standing when the music stops and the chairs are all taken. Of course, this is well known among politicians and economists. In fact, they are counting on it. When there is no economic growth, it has to be manufactured by stealing money from all of us to prop up the markets. How is it stealing? It is easier here to think of money as purchasing power, not of a real number or value. If more money in the system is driving up prices, but you are earning the same amount of money as you were last year, then you have less purchasing power. Where did it go? It went to the people who got a larger share of the moneysupply when it was inflated, ie. the banks and the different funds. Inflating the moneysupply to grow the economy will in the end destroy the system. The imbalances will grow so large, that it will change one way or the other. How that change will manifest has yet to be seen, but historically we've seen wars and revolutions.
We are therefor likely to see a lot more suffering and death in the coming years. When price increases in food staples like rice and corn, which is the basic meal of billions of people every day all over the globe, become so high that fewer and fewer are getting the calories they need to live, we may see hunger and disease and unrest on scales we can't even imagine. Once one country starts printing, the others have to follow or suffer the consequences. It's really a race to the bottom, and is in the end about power and who will come out on top of a now much smaller pile after the dust clears. We already know who will lose, it's the people who's income aren't "inflation adjusted".
We here in the northern part of Europe are lucky. A loss in purchasing power for us isn't so drastic. Even rising prices in the commodity markets due to all the free money being pumped into the system won't do more than restrict our vacation choices or maybe hold off on buying that new car until next year. At least for the short term. However, for the vast majority of the people on this planet who live on a few dollars a day, this will mean less food and basic necessities. Monetary protectionism (either via direct intervention like import taxes, market restrictions or subsidies) or indirectly via monetary policies and institutions (like the World Bank or IMF) have always been worst for the poor. Poor people starve every day because of the way nations keep other nations down with "free trade" policies. They aren't about freedom at all. They know that free markets would redistribute parts of our livingstandard to the poor nations. Our high prices and wages wouldn't be artificially propped up anymore, and more and more people would enter our markets with their products or services at prices which would undercut ours (This is called "social dumping" here in Norway). Free markets are therefor true socialism, the great equalizer between all nations and all people. An important part of a free market is money. While money is controlled by politicians and the global banking cartel and can be printed into existence, there can be no real freedom. The first step to help the poor should therefor be to change the way money works and open our markets to them. Right now, we are doing the exact opposite, and i don't expect it to change soon.
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