Countries all over the world are actively driving down their currencies or imposing caps. The side-effects of this currency warfare is an escalating leakage of monetary stimulus into the global system.
By Ambrose Evans-Pritchard
9:43AM GMT 01 Jan 2013
The US, Japan, Britain, as well as the Swiss, Scandies, and a string of states around the world, are actively driving down their currencies or imposing caps.
They are tearing up the script, embracing the new creed of nominal GDP targeting (NGDP), a licence for yet more radical action.
The side-effects of this currency warfare -- or "beggar-thy-neighbour’ policy as it was known in the 1930s -- is an escalating leakage of monetary stimulus into the global system.
So don’t fight the Fed, and never fight the world’s central banks on multiple fronts.
Stock markets have already sensed this, up to a point, lifting Tokyo’s Nikkei by 23pc and Wall Street by 10pc since June.
The New Year ritual of predictions is a time for bravado, so let me hazzard that the S&P 500 index of stocks will break through its all time high of 1565 in early 2013 -- mindful though I am of flagging volume and a wicked 12-year triple top.
The Shanghai Composite will continue its explosive rally as China loosens the spigot again. The Politburo is reverting to its bad old ways of easy credit for state behemoths, and an infrastructure blitz, with $60bn of fiscal stimulus as well for good measure. Reform can wait.
Yes, we all know that China has added $14 trillion in extra credit since 2009, equal to the entire US banking system. It is trouble waiting to happen. But trouble can be deferred.
The more that investors come to think another cycle of global growth is safely under way, the riskier it will be to hold corporate bonds, $8 trillion in the US alone. With yields priced for deflation, that bubble is dangerous to own on 10-year maturities. The money will rotate into equities and bullion, with China’s central bank driving gold through $2,000 at last.
As a polar bear, I doubt that such a happy cycle is upon us. We merely have a rally within a structural trade depression.
The headwinds of deleveraging will return with gale force. The glut of excess global savings that lay behind the great crisis of 2008-2009 -- and that has kept us stuck in the Long Slump ever since -- is still getting worse. The international trading system remains badly out of kilter.
There is chronic overcapacity across global industry and not enough demand to carry a full cycle of economic expansion, or to reach "escape velocity" as they say these days.
Until that changes, every global rebound is doomed to disappoint within a few quarters, and that includes the cyclical upswing of 2013.
The world savings rate averaged 21.7pc in the early Noughties (IMF data). It was 23.1pc in 2010, 23.9pc in 2011, 24pc on 2012, and is expected to rise to an all-time high of 24.6pc in 2013, and then to a fresh peak of 25.5pc by 2015.
The old culprit is the East. The new culprit is the West. A string of states are tightening ferociously in concert, disregarding the feedback effects on each other. Britain has a fat primary deficit and needs to so. Euroland less. It is slashing for doctrinal reasons, in thrall to Calvinism.
Even so, there is enough monetary fuel in the global economy to pack a punch into 2013. A good gauge -- six-month real M1 -- has recovered briskly from the mid-2012 contraction in Brazil, China, India, Britain, and the EMU-core.
Japan’s new premier Shenzo Abe is sweeping into office like Roosevelt in 1933, commanding the central bank to do whatever it takes to defeat deflation, deliver 3pc NGDP growth, and drive the dollar-yen rate to 90.
The Bank of Japan is already boosting its assets by 7.5pc of GDP this year. It will have to do yet more to satisfy Mr Abe. If he means it, Japan is about to give us all a nuclear monetary shock.
The Fed is no slouch either. It is printing $1 trillion in 2013, even though the money supply is already catching fire. It is has cooked up a jobless target of 6.5pc, meaning anything it wants. If this caps the dollar in the process -- and safeguards America’s shale-driven manufacturing revival -- Ben Bernanke might allow himself a wry smile.
Modern currency wars are a form of `pass the parcel’. They increase global stimulus in aggregate -- Nouriel Roubini is wrong to call it a "zero sum game" -- but those left holding the package come off worst. Or as the IMF puts it delicately, global imbalances "rearrange themselves into a different geographical constellation."
Europe chooses not to play because Germany controls the machinery, and Germany does not yet need help. So Europe will take it on the chin, and the Latin bloc will endure another year of slow asphyxiation.
The EMU story of 2012 was whether the Nordics would expel Greece to set a salutary example. The larger story of 2013 is whether the victim nations will start to question why subbordination in a D-Mark export sphere is in their interest.
The bond yields that once led headlines no longer matter now that Germany has agreed to let the ECB act as a lender-of-last-resort for Spain and Italy -- on tough terms, of course.
The focus is shifting from financial froth to the political economy. Debt auctions are passé. We all watch the jobles rate and opinion polls these days. And the poll that matters most is the rising support for the Front National’s Marine Le Pen, champion of the French franc, already pulling even with Gaulliste rivals.
The euro will reach $1.44, just as austerity bites in earnest, a ruinous mix. As France loses 50,000 jobs a month --and its car industry -- François Hollande will agitate for use of Article 219 (2) of the Lisbon Treaty, exhorting the ECB force down the exchange rate. By then it will be too late. Scorched-earth policies will have destroyed is quinquennat.
Italy’s lira parties will not win the February elections. But a scotched Silvio Berlusconi will be more dangerous to the 2nd Monti commissariat on the outside, with his sharp media teeth. Italy will be ungovernable. But there will be no `Badoglio’ moment, no walking out, this year.
Spain’s jobless rate will ratchet up from 26pc to 30pc as Mariano Rajoy does what he is told, slashing and burning, in the midst of an accelerating housing crash. The anomaly is why the Left -- in Spain, and across Europe -- continues to back a reactionary EMU agenda that sets policy in the interest of creditors and drives youth unemployment rise to 55pc. La trahison des clercs.
It is always hard in socio-politics to foretell a snapping point. It can come suddenly, by a chance event, like Britain’s Invergordon 'mutiny’ in 1931, or the shooting of French dockers in 1935.
Yet I see little to disturb Europe’s grim status quo this year. The riots of 2013 will be just as ineffectual as the riots of 2012. Contraction will grind on. Germany's Wolfgang Schäuble will have his way.
Yet it will be a Pyrrhic victory. Euroland will be left behind as the rest of the world moves on, lagging US growth by almost 3pc of GDP for a second year, and certain to lag again in 2014, the "new normal".
This is the year when it will become clear to many that Europe is in far deeper trouble than supposed; that it risks tipping into irretrievable decline; that it is wasting its precious youth at the worst moment, as the aging crunch nears, when it should have none to spare; that it is resorting to ever more coercive measures and autocratic methods; and all to save a currency that is the elemental cause of the disaster in the first place, and should morally be broken into its democratically-controlled parts.
There is no place for a monetary dictatorship in 21st Century Europe.
Clarity is a good start.
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