So Now It's a Currency War
Currencies around the world have fallen against the U.S. dollar, with that pace accelerating over the last year or so. But it took China's devaluation of its currency to spark talk of "currency war." Why? The fact is, China's devaluation has been relatively small compared to so many other countries.
It could be that in both the late 1990s and in 2008, the Chinese government faced financial crisis and did not devalue its currency. And over the past year, as China's stock market bubble began to crack, following the plunge in its real estate market, the Chinese central bank went out of its way to assert that it would not take a drastic measure like devaluation to combat falling asset values. Then came the recent report of a fall in exports.
With exports falling, even by the questionable reporting standards of the Chinese government, it became apparent that something was awry with Chinese economic growth. An economy that depends heavily on exports, whose exports have fallen, will have a hard time showing - even claiming - dynamic growth. Add to this the fact that China's Communist leadership relies on placating their population with dreams of prosperity, reversing their first decades in power which saw the party leaders grow rich as the population continued to wallow in poverty, with subsistence farming serving as the key economic activity of the vast majority of peasants, then and still the bulk of China's population. But with continued growth in jeopardy, the leadership likely knows that the occasional stirring in the peasant masses may turn into outright rebellion, or a threat of same. Such a turn of events could result in not only a falling from favor, but an actual collapse of the power of the Communists.
Scary stuff for the Communist leadership, already publicly branded with the extraordinary corruption that makes billionaires of the well-connected in exchange for a still tiny part of the people being allowed to engage in limited forms of free market activity to enable the purchase of private residences, color TVs, iPhones, and - in rare instances - even cars.
As we've pondered in recent posts, what level of fear has now gripped these Communist pooh-bahs? They've taken measures beyond anything in recent memory to combat what is finally being recognized as dire straits. Economic recession, falling exports, and now devaluation: What's next? More devaluation?
In any case, worldwide devaluations can no longer be seen as simply the flip side of a strong dollar. The recent 23% devaluation by oil-producing Kazakhstan only puts a cherry on top of the currency war cocktail being stirred over the last year:
It could be that in both the late 1990s and in 2008, the Chinese government faced financial crisis and did not devalue its currency. And over the past year, as China's stock market bubble began to crack, following the plunge in its real estate market, the Chinese central bank went out of its way to assert that it would not take a drastic measure like devaluation to combat falling asset values. Then came the recent report of a fall in exports.
With exports falling, even by the questionable reporting standards of the Chinese government, it became apparent that something was awry with Chinese economic growth. An economy that depends heavily on exports, whose exports have fallen, will have a hard time showing - even claiming - dynamic growth. Add to this the fact that China's Communist leadership relies on placating their population with dreams of prosperity, reversing their first decades in power which saw the party leaders grow rich as the population continued to wallow in poverty, with subsistence farming serving as the key economic activity of the vast majority of peasants, then and still the bulk of China's population. But with continued growth in jeopardy, the leadership likely knows that the occasional stirring in the peasant masses may turn into outright rebellion, or a threat of same. Such a turn of events could result in not only a falling from favor, but an actual collapse of the power of the Communists.
Scary stuff for the Communist leadership, already publicly branded with the extraordinary corruption that makes billionaires of the well-connected in exchange for a still tiny part of the people being allowed to engage in limited forms of free market activity to enable the purchase of private residences, color TVs, iPhones, and - in rare instances - even cars.
As we've pondered in recent posts, what level of fear has now gripped these Communist pooh-bahs? They've taken measures beyond anything in recent memory to combat what is finally being recognized as dire straits. Economic recession, falling exports, and now devaluation: What's next? More devaluation?
In any case, worldwide devaluations can no longer be seen as simply the flip side of a strong dollar. The recent 23% devaluation by oil-producing Kazakhstan only puts a cherry on top of the currency war cocktail being stirred over the last year:
The central Asian nation, which counts Russia and China as its top trading partners, said it was switching to a free float, triggering a 23 percent slide in the tenge to a record 257.21 per dollar. Since the shock yuan devaluation last week, a gauge of 20 developing-nation exchange rates capped its longest slump since 2000, Vietnam devalued the dong and currencies from Russia to Turkey and Malaysia slid at least 4.6 percent.So now we can all call it what it's been for months now: currency war. Was it ever anything but?
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