It doesn't seem like that long ago when I stood on a football field watching the play move away from me, towards the other side of the field, when I got whacked on the side of the head, crumpling me to the ground (yes-you get whacked hard enough you do actually see stars). For me, that was a lesson quickly and forcefully learned. Ever after-wards I kept my eyes open, all around, on the football field.
I've tried to extend the lesson to the capital markets. Today, investors are focused on the U.S. economic recovery and Europe's debt problems. Markets seem to get a nice boost from surprisingly good results from one or two technology companies. But sneaking up behind us are currency concerns. And they could crumple this market.
Japan has intervened to stop the meteoric rise of the yen. Geithner continually admonishes the Chinese for holding down the value of the Yuan. The U.S. talks strong dollar but clearly prefers a weak currency. The Fed obviously gives this considerable weight.
When a currency drops, it, in effect, puts its goods and services on sale on world markets. I live near a circle where catty-corner to each other are competing gas stations. All one has to do is lower price 2 cents on regular gas below the other station, and it has lines at its pumps.
In difficult economic times, currency devaluation enables a country to export its way out of recession. It is part of a protectionist "beggar thy neighbor" policy.
The scary part is that there is a tipping point when countries retaliate. This played out in the 1930s with the passage of the Smoot-Hawley tariff.
As they used to say on Hill Street Blues, "... be careful out there."
I've been wondering about this. Maybe they are actually egging the Chinese on, and if the Chinese do retaliate and react in a way that causes the US dollar to depreciate, they can simply blame the Chinese for what they wanted all on?
ReplyDeleteIt is sad to say but the U.S. likes to dictate policy to other countries. They admonished Japan for not acting aggressively enough and quickly enough in the '90s. Then we turned around and overreacted in 2003 by driving short rates to 1% and setting off the housing bubble. More recently I read where Germany is kicking our butt in China by supplying them with kitchens ( of all things!) which is a huge market. Today German unemployment rate is considerably below that of U.S. For years I recall the U.S. wagging its finger at the Germans and their high unemployment rate and socialistic ways.
ReplyDeleteAll I can say is the worm turns.