November 12, 2010

Phrase of the Day: Currency War

POLITICS - The words "Currency War" is on the lips of both politicians and the mass media today. The Lilith News used the words 6 days ago on November 6th. See "Currency War on the Horizon". But we're hardly the first people to use the term.

Indeed there is currently 1.36 million websites which mention the words "currency war" if you do a refined Google search.

And if you only search for News, there is 2,830 articles which make reference to it.

But what is a currency war you might ask?

Well, a currency war is when nations deliberately devalue their currency in an effort to boost their exports (by making their currency cheaper, their currency therefore becomes more affordable).


#1. China is currently pegging the Chinese Yuan to the American dollar, instead of letting it just float on the open market. The end result is that the Chinese Yuan is worth about 50% to 66% less than it really should be worth.

#2. In response the United States has begun printing more US currency, in an effort to #1 (pay off its debts to China) and #2 boost America's exports. This however can hurt the US economy over the long run if they flood the market with too much cash, causing hyperinflation (which is what happened to Germany during the 1920s).

#3. Historically countries used to protect their currencies by having tariffs (taxes on imports) which allowed their domestic economy to be quite strong, but resulted in a loss of exports to other nations which had similar tariffs in place. With the advent of Free Trade this is no longer a viable option.

#4. Printing phoney money of the rival country's currency. ie. If someone wanted to collapse the economy of South Whatistan all the rival nation would need to do is print billions of notes South Whatistan's local currency, causing rampant inflation and financial ruin.

#5. Following WWI Germany was forced to pay for the financial cost of the war to its enemies and it did so by printing more money. So much money that the Deutschmark devalued itself by so much during that time period that it became worth less than toilet paper. (Seriously, toilet paper would have been considered hard currency in those days.) Shown here is German children playing with stacks of money, which makes you realize how worthless Deutschmarks were at the time.

#6. Currency problems in Europe were such a hassle that most European countries decided to end their petty currency problems and unite under a single currency, the Euro. This has turned out to be a smart protective measure and boosted their domestic economies.

Now of course we have to remember one important distinction in all of this... money is inherently WORTHLESS. Its just paper. Its not like 100 years ago when many countries still used the gold standard (ie. the British pound used to represent exactly that, one lb of gold).

Yes, the USA still keeps quite a bit of gold in Fort Knox and other gold deposits around the USA, but the fact is that the United States Bullion Depository holds only 4,603 tons (4,176 metric tonnes) of gold bullion (147.4 million troy ounces) of gold.

And indeed gold prices right now are at record heights, recently passing $1,400 USD per ounce. That is quite a bit compared to December 2000 when gold was hovering around $240 USD per ounce.

Now if you're doing math that means the USA only has $206.36 billion USD worth of gold in their system. That is all that is backing up the value of USA's currency, even though there is no direct connection between the US dollar and the amount of gold the USA keeps in reserve.

Now when you compare that number to the US National Debt ($13.73 trillion USD) what you realize is that the USA doesn't have the gold or the strength of their currency to fall back on. The emperor is quite literally naked.

Now before you run out and start burning your money to keep warm, think again.

What this really means is that OBJECTS and REAL ESTATE is more valuable than money. ie. If you own a home (as in literally own it, and you don't have a mortgage or lots of debts) it means that you could be a lot better off than some other people who may run into trouble later as this currency war between the USA and China heats up.

However some might argue that the USA has already lost this currency war, purely on the basis that China has stocked up on so much foreign currency and owns so much of the United States' debt (see the image below) that the USA can't possibly hope to compete because if they even tried China could suddenly dump all of its foreign reserve currency on the market, utterly destroy the US economy and send the USA back into the dark ages...

But hey, who would China sell everything to then? What would be the point of destroying the global economy? The answer is that its pointless. China needs the USA as its trading partner and needs to wise up to the fact its own domestic economy is booming and will soon become the world's central economy.

NOTE: There is a book currently on sale in China called "Currency Wars", published by Song Hongbing in 2007. Its sold over 200,000 copies and is "read by many senior level government and business leaders in China". The book even predicted the banking crisis in the USA in 2008. The book argues that China should change its currency to become a representative currency (ie. off gold for example) instead of a fiat currency which is meaningless and worthless.

There is no doubt that China and India will become global centres in the 21st century global economy, but China needs to change how it conducts business with its currency if it wants to prevent a global economic collapse. (ie. One day we wake up and all our currencies are suddenly worthless because the financial system has fallen apart.)

One solution would be for China to slowly sell off its foreign currency reserves, buy up as much gold as it can using those currencies and then switch to a system wherein the Chinese Yuan is pegged not to the price of the US dollar, but pegged to the value of gold.

(Or alternatively, pegged to a basket of mineral prices, such as 1/4 gold, 1/4 silver, 1/4 platinum, 1/4 palladium, thus creating a system which is more stable than just gold by itself. Which in turns means that countries would have to create depository systems and stockpile these minerals.)

Indeed if every country switched to a gold/mineral standard it would unify our global currencies under one base currency. No phoney electronic credit system that nobody can trust (an idea that banks have been pushing because it would allow them to basically print their own money). A gold standard for everyone.

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