Last Friday the ongoing “Currency War” claimed an unlikely casualty – Switzerland, a nation best known for being solid in money and neutral in war. The central bank had to remove the ties to the Euro under pressure from foreign investors and the result was an upward explosion of 39%, before settling in at 15%, in the Swiss Franc (CHF, known by its French name Confédération Helvétique).
That may sound like good news for the alpine nation, and it is if you are holding a lot of CHF in a bank account. But if you make precise equipment or other things that the Alpine nation is known for, your stuff just got 15% more expensive. Managing this situation is going to be a tough one for the Swiss, certainly, but it’s a disaster for those who borrowed money from their famously solid and discreet banks.
It’s also an earthquake that rattles our whole idea of “globalism”.
While Syria and Ukraine have the world worried about war, a much cooler war continues across the world. This is the one fought not with bullets or missiles, but instead with big wads of cash. The currency war that has swept the globe since 2008 is continuing on many fronts, as we have discussed before.
It’s time for an update. Who is winning the currency war? Right now, the answer appears to be Japan, but China has more than a few tricks it is working on. Europe remains a big loser and the US is pretty much holding even.
The year was 1930. The greatest depression in US history closed around the nation like a dark shadow. Congress was desperate to do something that put the nation to work again. What could do it? Rep. Willis Hawley (R-OR) and Sen. Reed Smoot (R-UT) had a plan – close down imports and make Americans buy products made in America. Their plan, the Smoot-Hawley Tariff, raised import taxes on over 20,000 items to about the highest level they had ever been. Nations around the world responded with their own tariffs, starting with Canada, slashing all trade in and out of the US in half. Nearly everyone agrees that this made the Great Depression much worse everywhere.
Flash forward to 2013. Japan returns the Liberal Democratic Party to power on the promise to put the nation to work again. Their plan? Not to shut down trade, but to increase it – goosing exports by lowering the value of their currency and making their stuff cheaper.
The situations and the plans are very similar, but the underlying assumption is completely different. The world has passed from Nationalism to Globalism as the basic driving force. And that difference is worth thinking through.
The best way to destroy the capitalist system is to debauch the currency.
– Vladimir Lenin
Barataria was a bit skeptical about Japan’s “Abenomics” back in January. The first results are in, and they are amazing. Their economy grew by a developed-world-leading 3.5% in the first quarter, and the stock market is up 28% in 2013. It’s been called a “wealth shock”, and it’s very welcome in a nation that has been flat for two decades. What could possibly go wrong? Just about everything – and it’s likely to affect us here in the US. Ready for really cheap electronic gadgets? How about stagnating employment?
There is an awful lot going on in the world right now. It’s hard to find any one thing that is worth writing about, given all of the news. So let’s run down everything all at once.
“The long run is a misleading guide to current affairs. In the long run we are all dead.”
– John Maynard Keynes
A step back can be very illuminating, especially in economics. History teaches us an awful lot when we are willing to pay attention to what it says to us (which is almost never). The long run is also a good way to get away from current fashions, trends, and all the ways that everyone can fool themselves. Of course, as Keynes tells us, you run the risk of making a completely different mistake in the process. At least no two economists ever agree on anything, so there’s plenty of wiggle room.
It’s the bigger version of your typical financial reporting – “Stocks fell today on news that blah blah blah …” when in fact it was just a drippy grey April day in New York and everyone felt lousy.
A decade-plus trend, the increasing price of gold, is coming to a spectacular end. This may mean something very important – if it’s not the last gasp of the last bubble to work its way through our system.
Longtime readers know that one of the goals of Barataria is to report on news stories that haven’t made the mainstream nooze yet. Today we have three that are developing into what may yet be the most important economic and political stories of 2013 – the good, the bad, and of course the ugly.
There has been a lot of good news lately on the economy, even as the rest of the world flounders a bit. It’s that weakness that makes the potential bad news, especially as the world looks to us as a stable and safe place to park money. But the ugly story comes out of the place we’re used to being a dim spot, the US Congress, supposedly working on an actual budget for the first time in four years. Think their inaction could screw things up? Oh, no – it’s what they are doing that is actually much, much worse. So here are tomorrow’s stories as the develop today.