All’s Fair in Love and Currency War

[Image caption/credit: The Fog of (Currency) War (courtesy Google Images)

On Monday, The Washington Times reported (“People’s Bank of China decides to devalue its currency”) that,

 “In a potentially major move for trade and relations with the U.S., China’s central bank has decided to devalue its currency in a bid to shore up its sluggish economy.”

Most economists agree that increased inflation can “shore up” a nation’s sluggish economy.  But modern inflation on the international level is relative to other currencies much like a teeter-totter.  When one currency goes up, the other currency must go down.

If the Chinese yuan is inflated relative to the US dollar, the dollar must be deflated in relation to the yuan.  If the Chinese yuan goes down in value, the US dollar must go up in value.

I’ve argued for years that the US government wants and depends on inflation.  Proof?  Look at your fiat dollar.  It’s lost 95% of its purchasing power since we went off the gold standard in A.D. 1971.  That’s evidence of persistent inflation over a period of 40 years. That’s not a fluke.  That’s evidence of established governmental policy to promote inflation.

In fact, government (being the world’s biggest debtor) may not be able to survive prolonged deflation since it compels all debtors to repay their debts with more valuable dollars.

If my argument is correct, China’s decision to inflate the yuan will force additional deflation of the dollar.  Chinese yuan inflation will presumably help the Chinese economy but, the inflation/deflation teeter-totter will also cause US dollar deflation.  That deflation will harm all debtors, including the US government.  It should push the US economy toward depression.  That deflation might even threaten to impair or destroy all debt-based currencies.

Teeter-totter.  If yuan inflation helps China, it hurts the US.

From that perspective, did China inflate the yuan to “shore up” China’s economy?  Or did China inflate the yuan in order to deflate the dollar and push the US economy closer to depression and the US government closer to insolvency?

Did China inflate the yuan as a benign act of economic self-preservation?  Or did China inflate the yuan as a deflationary attack on the US dollar and US economy?

Or was it both?

 

  • “China’s decision to devalue the yuan sent shock waves throughout other Asian currency markets Tuesday, as China’s neighbors may have to let their own currencies devalue [inflate] to stay competitive withChina.  The South Korean won and the Australian, Singapore and New Zealand dollars all lost ground against the U.S. greenback.”

 

We’re witnessing a chain-reaction whereby China, by inflating the yuan, has caused a number of other nations to also inflate their currencies.  This currency inflation is being achieved in relation to virtually all other currencies—but occurs primarily in relation to the World Reserve Currency—the US dollar.

In fact, it crosses my mind as pure conjecture that that we might be looking at the Achilles Heel of any World Reserve Currency:

1)  Global economic decline;

2)  Which causes nations compete for falling market shares by inflating their own currencies in currency wars;

3)  Which global inflation (like a teeter-totter) causes the World Reserve Currency to suffer deflation;

4)  Which triggers an economic depression and possible political chaos in whichever country produces the World Reserve Currency;

5)  Which causes the world to seek a new World Reserve Currency and a new issuing-nation to lead them.

In other words, it might be that so long as the global economy is strong, there’ll be no currency wars and the World Reserve Currency will inflate and stimulate the economy of whichever nation issues the World Reserve Currency.  The world will go along with inflating the Global Reserve Currency so long as most of the rest of the nations experience rising prosperity.

Written by Alfred Adask
Full report at Adask’s Law

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