Only the Strong Have Weak Currencies!

By: Alex Wallenwein | Tue, Apr 19, 2005
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In this seemingly nonsensical environment of competitive currency devaluations, everything is turned on its head.

Under normal conditions, a strong economy would be expected to have - and desire - a strong currency so that it can afford to buy what it needs in international markets, so that international investors are naturally drawn to its currency's value, and so that its assets are widely seen as safe and profitable.

But not so in a world dominated by an artificially manufactured emphasis on "free trade."

Free Trade, the panacea of modern big-government politicians, social planners, and central bankers, is the very vise in the grip of which the world economy currently finds itself. The real pressure isn't even on yet, but the world is beginning to realize where it is headed.

Under an enforced free-trade regime like the one we currently have under WTO rules, exports are the singular road to riches for a country, whether it is listed in the "developed" or "undeveloped" column.

That's all fine and good, but a big problem arises when exports are treated as a "get rich quick" scheme that allows a country to bypass the necessity of building its internal market for the internal consumption of many, if not most, of its products. Unfortunately, the lure of easy money always brings out the worst in people, groups, and nations, and so they do what brings in money the easiest and quickest way - at the expense of real and organic progress.

The trouble with an export-dependent economy is just that: it's, well, DEPENDENT - just like a drug addict is dependent on getting his daily fix. If the several exporters' main customer suffers an economic setback or undergoes a shift in consumption patters, all of the exporters' economic, political, and social fabric is subjected to a serious stress-test.

Normally therefore, it only makes sense to aim for having several customers with a variety of consumption patterns, none of whom carry such a huge share of the exporter's production that the failing of any one economy can potentially wipe out all that has been gained on the quick road to riches.

But when an entire world's exporters or would-be exporters rely on mainly one single, huge, importer and consumer of last resort, and when that importer suffers from systemic, structural maladies that were brought on precisely because of its status as the world's number one consumer (and worthless fiat-currency issuer), then we got ourselves a problem.

And what a nice problem we are having.

Needless to say that this 'customer of last resort' we are talking about it the United States.

In a way, free trade was sort of a necessity for the US dollar system. It was literally 'life support' for an ailing and failing patient - the US dollar in its post-Bretton Woods, purely fiat, reincarnation after 1971.

Without continuous and increasing demand, any pure fiat system is dead on arrival. But ours was put on life support by using the US' huge worldwide influence to create an artificial dollar-demand machine that would artificially pump oxygen and blood into what would otherwise be a lifeless corpse. More cynical minds might call this system "Frankendollar" - or maybe "the Zombie currency."

That artificial dollar-demand machine was - and is - "free trade."

How does it work?

Underdeveloped countries with fairly skilled or trainable populations are given IMF "loans" which will enslave them to the dollar system. They must pay back the dollars they borrowed, so they must trade for them. Either they sell native raw materials, or they manufacture and produce things the US consumers desire.

To make them take on more loans or to restructure their banking and financial systems in such a way that the US can more easily trade with and control them, they are occasionally subjected to economic catastrophes (such as currency crises) which are then "cured" by - you guessed it - even more IMF loans.

When Americans buy their products, normally excessive credit-dollars are diverted from the US economy and injected into the world economy (alongside those already "loaned" out by the IMF).

To make all of this work, "trade barriers" must be removed. Any attempt of any country to defend itself against this fiat-dollar onslaught by using a tariff must be nipped in the bud. (In the process, of course, even the US must give up some of its sovereign prerogatives in that regard. After all, the string-pullers behind this system have no national allegiances. They have allegiance only to their own power and pocketbooks).

As the dollar rises, more and more dollars are pushed into the world economy through this system because Americans can now "afford" more stuff from abroad. It 's relatively cheap, compared to stuff produced at home.

So, the exporters' economies boom, more dollars are soaked up by international demand (preventing monetary inflation at home) and Americans are mentally and emotionally conditioned to believe they can "afford" a lifestyle they otherwise couldn't maintain. You see, it's a two-edged sword. It's not that regular Americans are arrogantly and wastefully consuming the world's resources. They are trapped into this same system, just like foreign exporters are. (Astute minds may want to ask: for the benefit of whom?!)

While this is going on, the US trade deficit first appears out of nowhere (we used to be a net exporter but now are net importers) and then grows and grows as an unsustainably high dollar gets Americans addicted to foreign imports and exporters addicted to US consumption patterns.

But then, the dollar begins a cyclical decline in forex values. As this happens, US demand for foreign products tends to shrink. But because the exporters are so addicted to US dollars, they must now compete for them. Their prices are already dirt-cheap, so they must keep their own currencies low to the dollar so US consumers can continue to do what they were bred and educated (by government schools and a beholden media/entertainment complex) to do: Consume! Borrow the money if you have to, but consume!! As this proceeds, US manufacturers find it more profitable to do their manufacturing in those very same exporting countries. So they "outsource". Now Americans must buy even American company-made products from abroad...

And the trade deficit grows.

Then countries like China come along with an inelastic currency-peg (which means nothing other than that China must print and sell yuan for dollars to depress their own currency's forex value and artificially raise that of the dollar). Other countries, like Japan or Korea, essentially do the same thing, although theirs is not as inflexible a policy.

Now the US gets into some normal economic trouble. The answer: it must crank up its own exporting business so companies can produce more, hire more workers, and thus gun the economy at home once more - so consumers can keep on consuming. Otherwise the world will come to an end.

So, the dollar must fall.

The result: world-wide, competitive currency devaluations where the "successful" countries manage to keep their currencies low (US, China, and other Asian-rim exporters) and other countries and economic blocs (South Africa, the EU, Canada) eat dirt because their exporting businesses suffers. (Especially gold investors are familiar with South Africa's woes which can't profit from gold sold for dollars because their own rand currency stays helplessly high against the dropping buck.)

Now add the Euro vs Dollar Currency War into the picture (which is just another name for the world trying to get off the dollar-skids and onto another, hopefully more stable, somewhat less addictive currency system), and you've got a real mess going.

Knowing where all this will end up, and how to deal with it in advance, is the difference between a retirement in financial self-sufficiency - or slowly awaiting your death while living on the government's dole.

Got gold?


 

Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

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