In Trade & Currency Wars, Governments Never Win and the Consumer Always Loses.

Originally Posted Thursday November 11, 2010 

While the US Government pressures China to allow faster currency appreciation in a desperate attempt to narrow trade imbalances, it seems to me that all of this is nothing more than a threat to trigger protectionism and further impede the global economic recovery.  

Today, after the latest meeting between leaders of the US and China, the Yuan rose to  a 17-year high against the greenback.This comes a month after a surprise rate increase was announced by China's central bank.

Both leaders of the US and China, desperately would like to achieve balanced and sustainable growth, but both leaders have internal political pressures that may run counter to reaching that goal.   

China’s record $28 billion trade surplus with the U.S. in August 2010 became political fodder for the latest midterm elections held in the US where many have scapegoated China for the US economic woes. Because of this many in the US maintain that an unfair cap on Yuan appreciation is to the detriment of U.S. businesses and US manufacturing jobs. President Obama, recently pledged to double exports within five years, and obviously can't make good on this promise if we continue to export nothing but jobs and debt, both to the delight of Wall St. and the chagrin of Main Street. 

China, along with Germany, opposed a suggestion last month by U.S. Treasury Secretary Tim Geitner, that the G-20 consider making targets to rein in excessive trade imbalances by having export orientated countries like China,  to let the value of their currencies rise, effectively, pricing them out of the market. So much to free trade.  

Of course, as I said in earlier posts, one must lead by example, and that' is tough to do when President Obama recently found himself defending this month’s decision by the U.S. Fed to buy $600 billion of Treasuries to stimulate the economy. Many see this as the US Fed's way of manipulating the US currency, and the effects could be a destabilizing of many markets, including most emerging markets.

If you have been following my other blog postings, you know that I am of the opinion that as China's economy continues to blossom and the vast majority continue to enjoy better lives than their past generation, the Chinese government will only succeed in maintaining its political hold as long as the economy continues to expand, offering the dream of wealth, to all. While many in the big coastal cities have been able to drink from the well of economic progress, the majority of the masses inland have not. Those people are now in queue to taste from the well of material successes. The Chinese government must be cautious to not allow for an uprising, much the same that the US government must seek to appease the Middle Class in light of their current plight at the hands of Wall Street. In the USA its about votes and financial backing for upcoming campaign's. In China, its now about continued growth for the purposes of civil stability.      

China, has in fact curbed the Yuan’s rise to about 3 percent since a two-year dollar peg was removed in June. But, as I opined earlier ( Read my blog "Can China Really Slow Down it's Economy...."), China is now arguing that letting its currency rise more quickly could cause social and economic unrest. Such unrest, would not be good for anyone, and would be equally disastrous in the US, where inflation would skyrocket, and all hope to export to China will be lost. And what happens to all those bargain hunting Wal-Mart shoppers that are predominately the working middle class?  Sadly, they would lose once again when they see the prices of the replacement products on the shelves, making it difficult to keep up whatever remains of their current lifestyle. Protectionism and loss of imports have historically led to the highest inflation scenarios (and world wars), in the last 100 years. Hard to see it being different this time, especially if the working classes are hurting and being told to blame others for their miserable lot in life.

The US is now arguing that a stronger Chinese currency would aid the US goal of increasing exports, hence, creating enough jobs to get out of the current doldrums of near double digit unemployment. Of course, while arguing for a stronger Yuan, the US is also taking actions to trash the value of the US greenback, making it difficult to convince global investors that all of this is nothing more than a political ploy. Most global investors doubt the Federal Reserve’s plan to buy more US securities will boost the U.S. economy or bring down unemployment. Most see it as a ploy and believe the US government is pursuing a weak-dollar policy.

Interestingly enough I just read in a new report that "Three-quarters of those surveyed say the central bank’s securities purchases -- or quantitative easing -- will have little or no effect on joblessness, according to a latest quarterly  Bloomberg Global Poll of 1,030 investors, analysts and traders who are Bloomberg subscribers. More than half say the Fed’s action won’t increase U.S. growth over the next year."

Most global investors think the Fed will have some success in lifting inflation, which is another goal, even if they don't say so. One in five say the Fed will get more than it bargained for and think inflation will increase to dangerous levels. I tend to agree, especially if we continue to pressure China to thread the needle without being cognizant of it's current concern's of social unrest should it act too quickly.   

Seventy percent of economists is a recent poll feel that the U.S. is deliberately keeping the dollar low against other currencies. It would be hard to convince the overwhelming majority that the US is not speaking from both sides of it's mouth when arguing that China has manipulated it's currency. In reality, most global investors are more in agreement to the policies adopted by the European Central Bank. Two-thirds say the European Central Banks acted wisely in deciding last week against taking additional action to stimulate the region’s economy. Fewer than half think the same of the Fed’s decision.

Most think that QE2 is just a smoke and mirrors way to cheapen the dollar in a desperate attempt to boost export competitiveness, which has led to complaints against the US policy from China, Germany and Brazil. Not a great way to lay a foundation to free trade with these three very important trade partners to the US manufacturing base.  

In conclusion, no matter how you look at this impending currency/trade war, it's not as clear cut and dried as many think, and it will take tremendous negotiating skills , compassion and foresight, to steer clear of the troubled waters ahead. Tw wrongs never make a right and the unintended consequences can be catastrophic, hence, cooler heads need to prevail here by ending the rhetoric to blame other nations for what ails them.    

Relative to the US policies, I  would like to see Wall Street be encouraged to invest in Main Street (like it used to be), and free trade agreements effectively negotiated and put in place. If the US is looking for the next decade to be better than the last, lost decade, it needs to recognize that cheapening the dollar, advocating protectionism, and not encouraging  investment in the working class, is not the panacea for the current mess, but a recipe for further conflicts and global disaster.

In the end, an entity with good leadership skills, needs to be respected by it's peers by not casting blame where it doesn't belong, and also understanding that it's leading by example can only be as successful as the success of it's own working class.  

About Me –I am a retired international trader that has spent 25 plus years in the global markets. At the time of my first (early) retirement I was the CEO of a business with offices in more than 20 countries. I have represented several State entities, traveled to China with several government officials and acted as a trade consultant for many Fortune 100 Companies. Check out my profile here on LinkedIn for more. 

I now spend most of my time as an independent consultant as well as chief development officer, business architect, advisory board chair and investment officer for many clients of AUTUS Advisory Partners https://autuspartners.com/project/james-vena/

Questions about international trade, commodities, globalization, foreign business development? Please feel free to contact me as I am available to act as independent consultant and adviser.  

James Vena

Twitter - https://twitter.com/JamesAVena 
LinkedIn Profile - https://www.dhirubhai.net/in/javena 

"May you always have Enough - Enough of the things that you need for yourself and Enough of the things that you'd like to share with others. I wish you Enough, so that your hand will always be extended in friendship and never in want."