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Currency War Being Led by Admiral Bernanke
Pinnacle Digest writes: In his recent article, Axel Merk explains the latest strategic move from Bernanke in trying to help the US win the currency war. Merk explains that by doubling down on QE3, Bernanke is trying to force China and Brazil to allow their currencies to appreciate. Not so much for Brazil, but for China in particular, if it tries to combat QE3 with its own form of monetary easing (which it isn’t in need of) to keep its currency low and stay competitive in manufacturing, it risks an uprising from its own people. When inflation began to increase to dangerous levels in China in 2010, its citizens took to the streets as basic items such as food and housing began to rise to unaffordable levels. It is well known that the Chinese government is fearful of an ‘Arab Spring’ type movement developing within its own borders.
Some may consider the term ‘currency war’ a bit extreme when explaining the strategy of the Fed with its QE programs. We do not consider it to be extreme in the slightest. “It was Brazil’s finance minister Guido Mantega that first coined the term, accusing Bernanke of starting a currency war” stated Merk.
Simply put, when one central bank prints money, it weakens the currency printed. And when one currency is weakened, another strengthens. It’s as simple as that. Therefor, the winner, in today’s global economy, is the country with the weaker currency. The goal with weakening a currency is to steal manufacturing jobs, or try and reclaim them in the American’s view. It lowers production costs and makes goods produced within the country more affordable. And as we all know, China has built the foundation of its economy on a weak currency and cheap labor.
So is there a currency war going on right now?
Merk explained “Bernanke speaking at an IMF sponsored seminar in Tokyo pointed to the other side of the coin: if China, Brazil and others don’t like his policies because they create inflation back home, they should allow their currencies to appreciate. But these countries are reluctant as stronger currencies lead to a tougher export environment.”
Those are fighting words from Bernanke. Simple math tells us that a strong currency in China only hurts its economy - at least right now. It doesn’t have enough of its own domestic product demand. It needs to ship goods abroad to stay afloat. The stronger its currency is, the worse off its economy will be; yet Bernanke suggests China should let its currency appreciate while he debases the dollar.
Still don’t think there is a global currency war being fought?
Consider this statement from Merk:
“Switzerland, the previously perceived safe haven by many investors, has taken the lead. Using a central bank’s balance sheet as a proxy for the amount of money that has been printed, the Swiss National Bank’s printing press has surpassed that of the Federal Reserve considering relative growth since August 2008.”
The whole mindset of central bankers globally is that price trumps quality when it comes to goods produced. And as such, lowering the value of your currency is the best offense. Merk takes exception to this strategy, but nonetheless, with that mindset from central bankers, the currency war is only going to get more intense. The clear winner of this war will be gold and the quality of goods will deteriorate.
Click here to read Axel Merk’s full report.